Is it opportune time to invest in international funds now?

Almost two years back, the world has witnessed something unprecedented with voluntaryclosure of each country's borders. The Covid pandemic has begun to unleash and none had aclue on how to counter it. Even we were unaware of how the virus spreads, mutates andimpacts the human beings. This near-synchronized lockdowns across the nations hassuddenly halted the world economic engine.

The central banks and governments have taken up the mantle to revive the economy anddid what they know is the best. Unparalleled amounts of money was infused particularlyacross the western & developed world in a bid to avoid contraction of the economies. Theflush of funds (Quantitative Easing, QT) did good for the lower rung of the population whileit also boosted consumption for which there is a haphazard supply. This imbalance has ledto steep increase in prices and thus set the inflationary conditions.

The restrictive conditions (mobility) and the oversupply of money created enormousdemand for alternative forms of communication ensuring that the productivities are notcompletely dragged down. The biggest beneficiary is the tech industry which was able tocompensate most of the traditional work shifted to remote. It has also attracted furtherinvestments in this sector, taking the stock prices higher.

This cycle reached peaks even as the policy makers debated if the inflationary conditions aretransitory. At the beginning of this year, the Russian-Ukrainian conflict added further woes.Initially, it disturbed the recovering supply chains impacting the food grain supplies. Theunresolved inflation was further exacerbated with the energy prices resuming an upwardjourney due to the fallout of the war.

Central bankers in a bid to control the zooming prices, which hit the records in more thanfour decades, went on a steep increase in interest rates. The consistent tweak in the rateswhich were artificially kept wrapped near or under zero simultaneously draining supply ofmoney (Quantitative Tightening, QT) has parched the desired liquidity for the sectors earlierbenefited by the QE.Most of these tech companies were using the easy money to expand the markets and spentmore money on market penetration leaving scant attention to profitability. Suddenly as theconditions reversed, they were bereft of liquidity which helped them to grow. Investors whowere willing to shell any amount to grab an opportunity to own these companies have nowbegun to shy away, resulting in price corrections.

Even as the companies scrambled to addressthe profits, they lost investor's confidence about their survival in certain cases.The tight liquidity conditions have impacted all asset classes as the risk premiums rose.Equities began to correct overall with highest pain in technology related companies. Thepopular broader index, NASDAQ has corrected by a huge level, slowly limping back part ofthe correction.In India, there were many international funds available to participate in the global markets,most of which are either UJS-centric or overweight on US equity indices. Of course, most ofthe exposure even in the MSCI global index is to US equities and it's natural for the fundsalso to position in that fashion. Among many Indian investors, US exposure particularlyNASDAQ was done through international funds or index fund-of-funds which were trackingthis index. The one-year return on this index stands at negative 29 per cent which went down over40per centin between.So,what should investors do? Investors exposed to this could use the correction to averageif they have invested in lumpsum. If the investment is staggered through SystematicInvestment or Transfer Plans (SIP/STP) are better off containing the investments. Therationale being that many of these companies are not going to be vanished overnightthough there would be an extended time of underperformance. Moreover, ensure that theexposure is not skewed towards these funds and ideally not exceed 20-25 per cent of the portfoliounless there's a specific need like overseas children's education. Also, an active timing ofmarkets could backfire as the current conditions could prevail for few more quarters as thecentral banks are resolved to tame the inflation to their desired levels.

(The author is a co-founder of Wealocty, a wealth management firm and could be reached at [email protected])