GLOBAL PORTFOLIO-THE NEW TREND OF THE DECADE

Date: 2 April 2007

Europe which was an earlier sign of slow growth rates, heavy government regulations and witnessed slow growth rates is slowly changing its image. The clear evidence of which can be drawn out from the following facts and figures , the euro is trading at almost all time highs, 1 euro is equivalent to 2$. Even the European economy is expected to grow faster than the US economy.
The dependence on US and US$ is slowly and slightly losing it luster and in the coming decade the European Economy and Euro will be a major share of all the global portfolios and foreign kitty’s. German DAX Stock index has returned a whopping 11% which translates into 14% return for US investors, as compared to it the S&P 500 US Stock Index has returned merely 3.8%. A positive trend to be noticed is the upsurge in the German Economy. As many as 50 small and medium sized German stocks have picked up by top US funds and have given a return of 22% in the past year 2006. Further looking at the German Funds it has been found that many funds have returned 35% during the past year , 38% annualized during the past three years and 27% per annum in past five years. The world economy will be fuelled by growth from other developing economies BRICS and from developed markets of Europe. In the coming years despite of strong appreciation of Euro currency and hike in the interest rates by BUNDESBANK of Germany, the central bank is quite optimistic of its growth being comparable to other developing and emerging market economies. This will create an opportunity in the near future for bullish investors in trading in Euro currency. Moreover the world economy is expected to grow at around 3% in the coming decade and growth seems to be more on balanced side. US economy slowing down can be well seen from the data shown in G7 meeting, earlier the US investors which were non stop shoppers. The imports from China are at 9 year lows and the trade deficit has also narrowed from $58.9 billion to $58.4 billion.
Global Portfolios and Country Mix is used by fund houses to hedge country specific risks. The same thing can be seen happening in Indian markets as well where Fidelity Management has recently launched its Fidelity International Opportunity Fund. The trends to be determined are its investing style. It plans to invest 65% of its equities in Indian corporate and the remaining 35% in overseas markets particularly the Asian Giants like China, Japan, Singapore, Hong Kong, Malaysia, Korea and others. But the cause of worry is the positive correlation between the Stock Markets in Asia. An evidence of it is the fall in Indian and other stock markets due to a fall in Chinese markets on Feb 27 2007. Similarly due to buoyant spirits and sustained capital inflows to other Asian economies, the Indian markets also went up. So it doesn’t make sense to diversify such a risk by investing in Asian economies which have positive correlation with India. Moreover Asian economies like Japan, China and Singapore are highly reliant on US exports for growth and with US economy taking a soft landing; it seems to be more profitable to include some European stocks especially of Germany and take long positions in Euro currency. A quick look at the performance of the MSCI Index shows that its returns were 26.6% CAGR in the last four financial years which is low as compared to returns sported by BSE 200 at 43.2%. Moreover most of the International Funds have taken high exposures in the Indian Markets primarily due to factors like strong domestic consumption, low reliance on US exports, large section of English speaking population, strong middle class represented with high earnings and spending capacity, streamlining of Indian taxation systems , continued Pension and financial sector reforms, capital account convertibility. In the past global asset mix was possible only for FI and FIIs but now with launch of global funds like Fidelity IOF, even the retail investors could benefit from investment overseas. In the coming years we see individual investors using their $50000 limit every year to invest abroad and this limit extends to $3 billion a year for Mutual Funds.