Fed Rate Hike: The Impact

The US market, up until the beginning of this year, surged over 100% from its March 2020-pandemic lows. Valuations for the top companies rose as the stocks benefitted from the emergency policies put in place to help stabilize the economy during the tumultuous times of COVID-19.

The rise went into reverse mode at the beginning of this year as the US Federal Reserve grew more hawkish and began tightening monetary policy at a more aggressive-than-expected rate to fight the surging inflation. The same started reflected in the valuations of the Fed has already raised rates by 75 basis points this year and based on the commentary and outlook provided by US’ Central Bank, more rate hikes are to be expected this year.



US Looking To Cut Tariff On Some Chinese Goods

During a recent press conference in Tokyo at the QUAD Summit 2022, US President Joe Biden stated that he will review tariffs imposed on Chinese imports amid requests from businesses to remove the levies. He stated “we did not impose any of the earlier tariffs—they were imposed by the last administration.”

Any move to reduce tariffs from US is expected to ease the supply channel from Asia’s biggest economy. To put it in perspective, over $300 billion in imports from China have tariffs applied on them currently by US itself. Even economists, lawmakers and the US Chamber of Commerce are appealing to the president to either reduce or eliminate the tariffs to counter the 4-decade high inflation.

Any such move can have positive impact on the US economy.

Supply Side Strain May Ease As China Opens Up From Recent Lockdowns

The Chinese economy was hindered once again in the last few months as major cities like Beijing and Shanghai went into an extreme lockdown due to the continental countries strict “zero-COVID” policy. Being one of the biggest exporters in the world, this affected the global supply chain immensely.

Now, China is looking to open up its major cities slowly after brining COVID cases under control. Shanghai, for example is expected to open up gradually through June.

Conclusion

The big companies are now trading at an attractive valuation, thereby providing good entry points for investors to buy into. Most of these big companies have strong fundamentals with deleveraged balance sheets and are only suffering due to the overall downfall of the US market. Even in this falling market there are certain sections like energy shares and defensive groups like utilities that have been outperforming the broader markets.

Global Invest

Here is why an Indian investor should look into investing in the international market

1. Participate in the global growth story

With access to international markets, you have the option of investing into the leaders & innovators across the globe. This helps you participate in the growth story of other leading economies – e.g. the US is home to large giants like Facebook, Amazon, Apple, Netflix, Google. To simply gauge the size of the US market which is the world’s largest stock market – US stock market is almost 16x of the Indian stock market. And Apple Inc. (which touched a $3 trillion market cap in early 2022) is just smaller than the GDP of the top 4 countries – simply put, on its own it is bigger than the 5th largest economy in the world!

2. Rupee Depreciation

Rupee has historically depreciated almost 2% - 3% per annum against leading currencies like the USD and EUR in the past 10 years. This means any Indian investor investing in foreign securities denominated in these currencies, would have seen his investment appreciated by 2% - 3% per annum merely due to the currency movement when converted in RUPEE.
Rupee Depreciation Chart

Source: Bloomberg Finance L.P., as on 1st June 2022

Dollar Appreciation Chart

Source: Bloomberg Finance L.P., as on 1st June 2022

3. Diversification

Since the winners across the geographies keep on changing and the underlying factors affecting various regions may be distinct from each other, there is a strong reason for diversifying one’s portfolio across economies. So, even if the economy takes a dip, the value of your portfolio will be affected only to a limited extent.

4. Accumulation of foreign currency

If you’re looking at accumulating global currency like US Dollars for kids’ education, foreign travel or other offshore investments including but not limited to real estate, global investing helps you create that corpus in the foreign currency and grow it efficiently.

5. Investor Protection

Developed economies like the US have extra tough customer protection laws to save customers from any wrongdoing by the brokerage house or the account provider. For example, brokers like Interactive Brokers offer a coverage of up to $500,000 (almost Rs. 3.7 crore) against failure of broker-dealer.

6. Fractional shares

One unique aspect of US bourses is it allows fractional ownership of shares. Fractional shares let investors purchase select stocks based on a dollar amount they want, rather than the price of a whole share. This makes investing globally in US stocks affordable (e.g. you can own a fraction of Tesla shares for just $1, where each share costs almost $900 which is around Rs. 68,000 OR you can own a fraction of Amazon share for just $1, where each shares costs almost $3200 which is around Rs. 2,40,000). Hence the minimum ticket size for taking an exposure to US securities is low.

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