HomeMoney & FinanceUkraine conflict exposes single nation, single currency risk

Ukraine conflict exposes single nation, single currency risk


The Ukraine conflict has brought about a collapse in the values of Russian assets such as stocks and bonds. It has also brought down the Russian currency, Ruble. The Ukrainian currency, Hyrvina, has also suffered an impact. The conflict highlights the danger of the single currency – single country exposure to the Indian investors who have most of their investments in domestic stocks and bonds.

Indian equities have enjoyed a long period of good returns. The MSCI India index seen in dollar terms has outperformed the MSCI all country world index over the past 3 years and 5 years, although not the past 10 years. Since the index is denominated in US dollars, it also takes rupee depreciation into account. Indian outperformance vis-a-vis other emerging markets is particularly stark. Over the past 3, 5, and 10 years the MSCI India index delivered a CAGR of 16.67%, 13.93%, and 8.68% respectively beating the MSCI emerging markets index overall 3 time periods. The latter gave returns of 7.56%, 8.68%, and 4.53% respectively. However, returns over the long run tend to mean-revert and hence the outperformance may not continue indefinitely.

 

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Single country and single currency risk is the risk of having all your investments in just one country and currency, even if it is your own country by citizenship. Political, economic, and military issues can cause the value of such investments to drop sharply. Indian investors have gradually been taking exposure to foreign stocks such as US tech companies over the past few years. The mutual fund industry has also launched several overseas funds during this time, to provide global diversification. However, this process came to a halt since mutual funds hit a Sebi-mandated industry-wide limit of $7 billion in early February. All fresh investments in international mutual funds (apart from those investing in ETFs) have been suspended for nearly a month. Investors can invest outside India through the liberalized remittance scheme (LRS) of the RBI. Under this route, investors can remit and invest up to $2,50,000 per year in foreign stocks and bonds.

“Any period of financial crisis resulting from country-specific reasons is likely to see a correction in the stock markets as well as a simultaneous weakness in the currency. In such a period, if any investments are held outside the home country, they can protect an investor’s portfolio to an extent—since the foreign investments may not be impacted,” said Prableen Bajpai, founder, FinFix Research and Analytics Pvt Ltd. Bajpai also highlighted the cushioning impact of having investment denominated in foreign currency.



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