Why Indian Investors Should Explore Investing In US Stocks Amidst A Surging US Dollar?

The dynamics of global finance are ever-changing, influenced by geopolitical events, market sentiments, and shifts in economic indicators. One such crucial parameter that has gained significant attention recently is the surge in the value of the US Dollar. While this can have a multitude of implications worldwide, it also opens a window of opportunity for Indian investors to take advantage of this trend by venturing into the US stock markets. In this article, we share more details about why building a global portfolio is essential for Indians.

Benefit from Dollar appreciation

In Q2 2023, the Dollar index (DXY), which measures the Dollar against a basket of other major currencies, touched a high of 105 (in Sep 2023, DXY is up by 11% in the last 5 years, see the sidenote on DXY to understand), indicating a strong American currency. By investing in the US markets in Dollars, an investor can gain from not only stock market returns but also from the overall appreciation of the Dollar against other currencies. Over the last 10 years, the Dollar has appreciated about 3-4% annually against INR. This means that irrespective of how the stock market performs, this is an additional return you can earn.

Hedging against domestic risk and geographical diversification

The Indian market, like every country's market, is subject to risks like political instability, market volatility, and economic factors like inflation and unemployment. By diversifying your portfolio to include US equities, you can hedge against such risks. The US market, with its mature financial framework and regulatory environment, offers a degree of safety and stability.

Technological dominance

The US is home to the world's leading technology giants, such as Apple, Google, and Amazon. Investing in the US stock market enables Indian investors to tap into the growth prospects of these global leaders. For instance, Apple's revenue for the fiscal year 2022 stood at $365.8 billion, up by 33% compared to the previous year. These numbers reflect the tremendous scale and growth potential that investors should leverage.

Dividend yields and capital appreciation

Blue-chip companies in the US often pay out consistent dividends, providing a regular income stream for investors. For example, the S&P 500's average dividend yield was around 1.3% in 2022, with some sectors offering higher yields. Coupled with the potential for capital appreciation in a booming economy, this offers a dual advantage for investors from India.

Tailwinds from policy measures

Policy measures in the United States often set the stage for significant growth in various sectors, creating a ripple effect that can be advantageous even for international investors. For Indian investors, these American policy tailwinds offer a unique opportunity to tap into sectors that may not be as developed or accessible in India.

By investing in the U.S. market, you can benefit from robust economic policies that drive innovation, growth, and profitability. Below, we look at one such sector - the Electric Vehicle sector as an example of how certain policy tailwinds in the U.S. provide an opportunity to invest in a sector that might not be available in India.

Example

EV dominance in the US

The U.S. has been at the forefront of the Electric Vehicle revolution, with companies like Tesla, Rivian, and Lucid Motors leading the way. American policy measures have further boosted this sector:

Federal tax credits: The U.S. government provides federal tax credits of up to $7,500 for new electric vehicles, incentivizing purchases and thereby aiding companies in the sector.

Infrastructure investment: As part of the larger infrastructure bill, there's a plan to invest billions in creating a network of EV charging stations across the country.

State-level incentives: Apart from federal policies, many states offer additional incentives like rebates, toll exemptions, and HOV lane access for EV owners.

Corporate fleets: Policy encouragement for corporations to shift to electric fleets provides a vast, untapped market.

Limited exposure in India

While India has ambitious plans for EV adoption, it is still in the nascent stages compared to the U.S. There are limited opportunities for direct investment in pure-play EV companies in India. Here, most EV initiatives are subunits of larger conglomerates, diluting the impact of the EV growth story on the overall stock performance.

Given this background, Indian investors can significantly benefit from investing in the U.S. EV sector.

In Conclusion

Irrespective of how the US Dollar moves in the short-term, Indian investors should consistently look to diversify their portfolios by including US equities. Not only does this offer a hedge against domestic risks, but it also enables them to partake in the growth stories of global giants. The key is to make informed decisions by consulting financial advisors and leveraging the tools and resources that modern investment platforms offer. By doing so, Indian investors can turn the challenge posed by a surging US Dollar into a substantial financial opportunity.

Sidenote on DXY Index

The Dollar Index (DXY) is a measure used to gauge the value of the U.S. dollar relative to a basket of six major world currencies: the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, and Swiss Franc. The Euro has the most substantial weight in this index, followed by the Yen and the Pound. Understanding the DXY is important for anyone involved in forex trading, commodities trading, or those looking to hedge against currency risk or interpret global economic health.

Here's a guide on how to read the DXY index:

The basics

Base year and value: The DXY was established with a base value of 100.000 as of March 1973. A value above 100 implies the dollar has strengthened compared to its initial state, while a value below 100 means it has weakened.

Direction: If the DXY is rising, the U.S. dollar is gaining strength compared to other major currencies. Conversely, if it's falling, the dollar is weakening.

The magnitude of change: A 1% change in DXY is substantial and typically reflects a significant change in market sentiment or economic conditions.

Interpretation

Global economics: A strong dollar (high DXY) usually implies global investors see the U.S. as a safe investment. Conversely, a weak dollar often suggests increased investment in other world currencies or assets.

Trade impact: A strong U.S. dollar makes American goods more expensive for foreign countries, possibly hurting U.S. exports. On the flip side, a strong dollar makes imports cheaper for U.S. consumers.

Commodities: Commodities like oil and gold are usually priced in U.S. dollars. A strong dollar could therefore make these commodities more expensive for other nations, affecting demand.

Investment decisions: A surging DXY might be an indicator for international investors to enter U.S. equity markets or bond markets, especially if they expect the dollar to continue to strengthen.

Currency pair trading: Forex traders who engage in currency pair trading often use DXY as a benchmark to gauge the general direction of USD-based currency pairs.

Interest rates and monetary policy: The DXY can be influenced by decisions made by the Federal Reserve, particularly changes in interest rates. Higher rates often attract foreign capital, boosting the dollar and thus DXY, while lower rates usually lead to a weaker dollar and a lower DXY.

The views and opinions stated in the content belong to Viram Shah, Co-founder & CEO, Vested Finance- SEC Registered Investment Adviser.

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.