Investors often look for strategies to maximize their returns while managing risk, and one key insight from Saurabh Mukherjea, founder of Marcellus Investment Managers, highlights a compelling opportunity: the differences between Dalal Street and Wall Street. While the Indian and US stock markets may offer similar long-term returns, their movements diverge, presenting a prime chance for diversification. Mukherjea believes that Indian investors focusing exclusively on local markets might be neglecting significant benefits that come from exploring international equities.
The Divergent Paths of Indian and US Markets
Mukherjea points out that although both markets have historically delivered robust, earnings-driven returns, their trajectories are not closely aligned. The US market is known for its consistent performance, largely independent of GDP growth, positioning it as a top performer on a global scale over 10- and 20-year periods. However, the correlation between Indian and US equities remains relatively low, which is a key factor in enhancing portfolio diversity.
- Key Insight: The low correlation provides an opportunity for Indian investors to hedge against local market volatility.
The Advantage of Low Correlation
The allure of the US market for Indian investors lies in its weak correlation with Indian stocks. Mukherjea emphasizes that the rolling correlations between the S&P 500 and Nifty 50 typically fluctuate between 40% and 70%. This means that while both markets can respond to global trends, local incidents—such as the IL&FS crisis in 2018 or the US rate hikes in 2022—can impact one market more than the other, thus creating advantageous conditions for portfolio diversification.
- Investment Strategy: Consider integrating US stocks to mitigate risks associated with local market downturns.
Real-Life Examples of Market Divergence
The COVID-19 pandemic serves as a poignant example of how diversification can shield portfolios from significant losses. During this period, while both Indian and US markets faced challenges, India experienced a notable downturn exacerbated by the depreciation of the rupee. In contrast, US stocks showed more resilience despite facing their own pressures, such as the rate increases in 2022.
- Quote from Mukherjea: “The different behaviors of these markets during stressful periods underline the effectiveness of diversification.”
Exploring the Global Compounders Portfolio
Mukherjea also showcases Marcellus’ Global Compounders Portfolio (GCP) as an effective model for diversification. This portfolio dedicates 80% of its assets to US equities, with the remainder invested in high-quality stocks from regions such as Europe and Canada. Since its launch in October 2022, GCP has outperformed the S&P 500 while maintaining a 40% correlation with Nifty’s weekly returns. Indian investors can participate in this portfolio through GIFT City-based SMAs or as accredited investors, starting with a minimum investment of USD 25,000.
The Case for a Balanced Portfolio
Mukherjea advocates for a mixed portfolio approach, suggesting that an annual rebalancing strategy between Indian and US stocks can lead to superior performance compared to a solely India-focused investment plan. This method not only enhances returns but also helps reduce overall volatility, making it a smart choice for long-term investors.
- Final Thought: “Successful investing is about finding the right balance, not just favoring one market over another,” Mukherjea concludes.
In conclusion, Saurabh Mukherjea’s insights highlight the critical importance of global diversification for Indian investors. By strategically blending both Indian and US equities, investors can achieve better returns while minimizing risks, thanks to the inherent differences between these two dynamic markets.
