Prepare for a currency collapse! Strategies of USD and Gold to Hedge INR. With Saurabh Mukherjea Pt1

Summary

This discussion delves into the importance of currency hedging, global diversification, and investment strategies for protecting wealth in the face of currency risk. The speaker highlights how the Indian Rupee tends to lose value over time and the need to hedge against it by diversifying investments globally, especially between the US and India. Applying Harry Markowitz’s theory of diversification, the conversation covers methods like investing in US ETFs, gold, and portfolio management to mitigate risks. The speaker also addresses India's evolving tax policies that make global diversification more accessible and efficient.

Takeaways

• 😀 Currency depreciation risk: Over a decade, the Indian rupee tends to lose between 30% to 40% of its value against the dollar, which presents a risk to savings and investments.
• 😀 Importance of diversification: Hedging against currency risk and diversifying investments globally can protect families' wealth when the domestic currency declines in value.
• 😀 Currency collapse can lead to social and political unrest: Historical examples like Turkey, Argentina, and Sri Lanka show how currency collapse can result in financial turmoil and political instability.
• 😀 Marovitz's portfolio theory: By diversifying between uncorrelated assets (e.g., India and the US), investors can reduce risk while enhancing returns, leading to a better risk-adjusted performance.
• 😀 Low correlation between India and the US markets: India and the US typically operate in different market cycles, which means their markets often don’t fall together, making them ideal for diversification.
• 😀 Long-term performance: The US and India are among the best-performing markets over the past 10, 20, and 30 years, with both showing consistent double-digit returns in dollar terms.
• 😀 Global diversification approach: A 50/50 split between Indian and US equities can help investors get higher returns while maintaining lower risk due to the low correlation between the two markets.
• 😀 Tax reforms in India: Recent Indian government reforms, including the harmonization of long-term capital gains tax, have made it easier for investors to diversify globally.
• 😀 Overcoming investment obstacles: With the new overseas portfolio investment regime, corporates in India can now invest up to half of their net worth in global funds, overcoming previous investment caps.
• 😀 Gold as a hedge: Gold, particularly in ETF form, serves as a dollar hedge and a safeguard against rupee depreciation, making it a key asset for global diversification strategies.
• 😀 Investment vehicles: For individuals with limited funds, investing in global ETFs (e.g., S&P 500 or NASDAQ) can be a cost-efficient way to diversify globally without incurring hefty taxes on short-term gains.

Q & A

What is currency hedging and why is it important for investors in countries like India?

Currency hedging is the strategy used by investors to protect the value of their home currency by diversifying into assets or currencies of other countries. In India, where the rupee often loses value against the dollar, currency hedging helps safeguard savings, pensions, and salaries from the negative effects of currency depreciation.

How does the rupee’s depreciation affect India’s economy and individual finances?

The rupee’s depreciation typically leads to rising prices of goods and services, making daily life more expensive. It affects fixed deposits, pensions, and salaries, eroding their purchasing power. As the currency loses value, inflation rises sharply, impacting savings and investments.

How does the concept of diversification help mitigate the risks associated with currency depreciation?

Diversification involves spreading investments across different assets or countries to reduce the impact of one market or currency's downturn. By balancing investments between assets like the US dollar, gold, or global ETFs, investors can protect their wealth against the fluctuations of their home currency.

What is the significance of the Harry Markowitz theory of portfolio diversification?

Harry Markowitz’s theory suggests that investing in two uncorrelated assets can provide higher returns with lower risk than investing in a single asset. This principle encourages balancing investments in markets like India and the US, where economic cycles often do not align, providing better risk-adjusted returns.

How does the correlation between India and the US stock markets impact investment strategy?

The low correlation between India and the US stock markets means that the two markets often perform differently, allowing investors to benefit from a diversified portfolio. By investing in both markets, investors can reduce risk and improve their overall returns, especially during times when one market outperforms the other.

What are the key obstacles to investing abroad for Indian investors, and how have recent reforms addressed them?

Key obstacles included high long-term capital gains taxes on foreign investments, the $250,000 per year limit on overseas investments, and short-term capital gains taxes. Recent reforms have addressed these by harmonizing the long-term capital gains tax at 12.5% and introducing the Overseas Portfolio Investment regime, which allows Indian corporations to invest abroad.

How can individual investors in India overcome the restrictions on overseas investments?

Individual investors can use the Liberalized Remittance Scheme (LRS) to invest up to $250,000 per year, while corporations can now use the Overseas Portfolio Investment regime to invest globally. Additionally, tax-efficient investment through offshore jurisdictions like the Cayman Islands can help manage short-term capital gains tax issues.

What are the most cost-efficient ways for smaller investors to diversify globally?

For smaller investors, buying ETFs like those tracking the S&P 500 or NASDAQ is a cost-effective way to gain exposure to global markets. Investors should hold these ETFs for at least two years to avoid high short-term capital gains taxes. Gold ETFs are also a good hedge against currency fluctuations.

Why is physical gold considered a safer investment than gold ETFs in some situations?

Physical gold is widely accepted as a store of value across the world. However, in countries with law and order risks, keeping physical gold can expose investors to theft or loss. On the other hand, gold ETFs offer easier management and security, but may carry the risk of the fund’s collapse. The risk of theft makes physical gold a less practical option in certain countries.

What is the future outlook for India's economy, according to the speaker?

The speaker believes that while India's economy has experienced strong growth, there are concerns about slowing corporate profitability and high valuations in certain sectors, particularly small and midcaps. However, India’s long-term growth prospects remain strong, especially when compared to global markets, which continue to offer attractive diversification opportunities.