Home Country Bias

At heart, we are all very Nationalistic. We love our country regardless of whether its the United States of America or Zimbabwe. One reason for the unreasonable love maybe due to the fact that we are all invested in the progress of the country we live in (which for a large part of the population also happens to be the country one is born in).

We earn our living in the currency of of our country and invest our savings in assets  in the same currency. We are in a way tied to our country’s progress. If our country sees strong growth, it makes our investments do better than if our country goes through a turmoil.

For instance think about a rich Zimbabwean who after years of toil had saved a good amount which he believes should see him through. And then, Robert Mugabe happens and by the time he realizes what is happening, his savings is really worthless (regardless of how much he had saved).

While the Zimbabwean Dollar has long been replaced in the country, two days back, it was given the Official burial with the final exchange rate set at $5 USD for 175 quadrillion Zimbabwe dollars. Any idea how many Zero’s it takes to make it a quadrillion?? Its 15 Zeros – FIFTEEN.

Recently, in Venezuela, the stock market exploded going up 92% in May. Of course, this gain is really notional given the fact that Inflation last week broke through the 500% mark. It will take even more of gains just to be at the same place where they were say in the last year.

While we are lucky that India may not face such a exigency, the fact that we are completely loaded on our home country is a risk we carry at all times. Our Jobs, our Investments, our Savings, literally everything is Rupee Denominated.

Of course, this is not surprising given the fact that home country bias (in Investing) exists in every country where the vast majority either have no way to diversify or prefer not to diversify. But given the enormous risks we take, would it not be a bit better if we could save a small portion of our savings outside India.

A report I found on a investment website gave the percentage of assets we Indians have in India at 99.7%.

A key reason for the low percentage maybe due to the fact that most Indians could not have until recently invested outside even if they wished to, unless of course they took the ill-legal route.

Savings outside of one’s country diversifies oneself in two ways,

1.  The savings being in other country is not exposed to the risks that the Indian Economy is exposed to AND

2. The savings being invested in a currency other than our own means that in the unlikely case that the Rupee goes for a tumble, our savings continue to hold value.

Lets for example take the case of Gold. Gold moves daily based on two factors – Demand Supply and Currency moves. Demand Supply is a key criteria but even if Gold was stagnant for a day, the price in India may change due to the change in Indian Rupee vs the US Dollar.

When one buys’s gold, one is hence also hedging against the Rupee. If for example, Rupee appreciated strongly against the US Dollar, we could see (assuming on change in price of Gold in USD terms), a fall of a similar ratio and vice versa.

One of the best books in this area would be Meb Faber’s Global Asset Allocation: A Survey of the World’s Top Asset Allocation Strategies.

In this book, not only he reasons out why one should invest outside one’s country but also provides strategies as to how to go about it. I strongly suggest you read the book to have a better understanding of the rationale behind investing outside one’s own country.

But investing outside one’s country is not easy for us since unlike the United States, our exchanges do not have any ETF’s of other counties (save for the highly illiquid Hang Seng Benchmark ETS). But in the Mutual fund arena, we do have a bigger choice with multiple Fund of Funds available for investment. In addition, we have funds like PPFAS which invest a substantial portion of their portfolio in stocks outside India.

If you are a serious investor with the ability to invest directly into country ETF’s, you can always do that by investing via a broker who allows you to buy securities traded on the US stock exchanges.

But with India growing at 7.5%, you may wonder if this really is a worthwhile route. To answer that, lets check out the chart of HangSeng Bees plotted against Nifty Bees.

Despite the fact that we have had a Modi Rally, Hang Seng has literally beaten us black & blue 🙂

While Meb Faber in the book I referred to earlier goes to say that one should invest as much as 40% of one’s portfolio, I believe that at the very minimum, one should consider investing at least 10% of one’s investment outside India.

Investing outside India is not Anti-Nationalistic, its just a way to safeguard our savings against extreme events over which we may or may not have any control.