The positive news is that the Indian economy’s growth outlook is bright; as economic activities resumed, the government increased capital expenditure and lockdown restrictions eased significantly.

India’s gross domestic product grew 0.4% on a year-on-year basis in the quarter ending December 2020, according to data released by the National Statistical Office.

Foreign and domestic investors show much confidence in the Indian markets which translated into a prolonged bullishness. The benchmark stock index Sensex is hovering near the 50,000 points mark, and the impression is that key sectors will be coming up with improved results in the current quarter.

With the easing lockdown restrictions, the pickup in economic activities, increase in consumer demand and benign inflation, India will continue to remain an attractive destination for foreign institutional investors.

Wealth creation strategy

Advisers are suggesting that investors adopt a wealth creation strategy with a long-term perspective that involved monthly investments in high growth stocks.

Among the various options suggested are mutual funds through systematic investment plans (SIPs), fixed deposits (FDs), debentures, non-convertible debentures (NCDs), bonds and property.

“Investors with a long term perspective, say up to a three-year horizon, can look at corporate bonds and debt funds. Still, the SIP route is highly recommended for retail investors to taste success in mutual fund investing. Here are also cherry-picking opportunities now and for some more time as the growth outlook is positive,” said Manoj Vallikudiyil, managing partner at Manjul Associates, securities and investment consultants, Dubai.

Fixed deposits have always been the most favoured investment tool for NRIs who look for somewhere safe to park their funds, though the returns are comparatively low. This could change in 2021 as interest rates on fixed deposits could start inching up. Deposit rates are set to go up by the second half of 2021.

Some banks and non-banking finance companies have already started increasing deposit rates across tenures, especially rates on longer term FDs.

“Macro-economic indicators point towards a rise in deposit rates starting from the second half of the FY 2021-22. Til then, depositors should keep their money parked in shorter tenure FDs to retain the flexibility to shift their savings to higher rates once the rates begin their upward journey,” said Vallikudiyil.

No to international funds

Another piece of advice is that NRIs are advised not to invest in international funds owing to additional currency transaction costs.

Also, they should be aware of their tax liabilities when investing in mutual funds and be clear whether they are investing in a debt-oriented or equity-oriented scheme.

NRI investors should also make sure that the underlying funds in equity-oriented schemes only invest in Indian companies.

They should also keep the exchange rate fluctuation and taxation in mind when looking at investing into the Indian mutual fund industry.

In equity or an equity-oriented fund, the tax rate below 12 months is 15% plus surcharge, depending on the taxable income in India.

If the taxable income is below INR 5m (£48,904, $68,078, €56,516), no surcharge is applicable.

Long-term capital gain tax on equity-oriented mutual funds above 12 months is 10% plus surcharge, plus 4% cess.

The long-term capital gains tax is below 12%.

When investing in non-equity-oriented mutual funds, below 36 months, there is marginal tax.

If it is short term, ie below 12 months, the mutual fund will deduct 30% tax on short-term capital gains and deposit with the exchequer.

The investor can claim it back if his tax outgo is lower.

Property market

The weaker rupee is a trigger to invest more in Indian property market.

More than investments, many NRIs are buying property for end-use. In fact, this trend was seen since the beginning of the pandemic, as evidenced by a recent study which said 38% of those booked property in India in 2020 were NRIs.

A south Indian real estate company said apartments and villas sold to NRIs went up 40% since the pandemic struck, compared to the previous year.

The rupee is expected to depreciate further with crude oil prices rising and the Reserve Bank of India adopting a no-intervention strategy. This will again prompt NRIs to put their money in property.

Further, the housing finance rates are coming down drastically so that they can go for their dream houses at affordable rates.

NRIs who plan their financial future are often faced with a difficult question: Should they invest in dollar-denominated investments in the country where they live or send money back home to invest in property, stocks or park in fixed deposits?

“One challenge with local investment in India is that the Indian rupee has fluctuated significantly in recent years, with a continual downward trajectory,” said Rajesh Nair, Dubai branch manager, Alliance Insurance.

“The rupee has lost approximately 41% of its value against the US dollar since its height in 2011, for an average depreciation of more than 5% per year.

“For that reason, it is sensible to diversify into a dollar-denominated global investment strategy.”

Diversify portfolio

The purpose of diversification is to guard against risk.

It is designed to protect the investor because when one investment loses money—whether through depreciation, or other market conditions — that loss is more likely to be offset or minimised by the performance of other investments.

To that end, there are several advantages to dollar-denominated investments that make them a worthwhile addition to a well-diversified portfolio.

Nair said one significant benefit of dollar-denominated investments is that they are a stable hedge against the depreciation of the Indian rupee.

Explaining how significant is the difference, Nair said: “Had you purchased an insurance plan for INR10m ($135,561, £103,939, €114,894) in 2011, when the rupee had an exchange rate of INR44.20 to $1, your insured amount would have been the equivalent of $226,244 in 2011.

“But the current value of that plan would be just $145,015, a depreciation of nearly 36%.

“By contrast, if you had purchased a dollar denominated policy for $226,244 in 2007, its current value in INR would be INR15.6m.”

Portability benefits

Dollar-denominated insurance and investment products are also easily portable anywhere in the world.

Most insurance plans offered in the UAE are based offshore, and will continue to cover the insured during foreign travel or after permanent international relocation.

This reduces costs because investors can retain the same investments throughout their lifetimes, without the need for currency conversion or the purchase of a new product upon relocation to a different country.

Dollar-denominated investments have proven stable in present times of regulatory uncertainty.

The financial crisis of 2007/08 led to an increasingly complex global regulatory landscape.

While there has been a push for deregulation, many investors have looked with skepticism upon investment products denominated in fluctuating currencies in emerging markets, fearing such investments may prove unstable and lead to further crises.

By contrast, the dollar has never been devalued and the currency notes have never been invalidated, like what happened in India in 2016.

For this reason, the dollar is the unofficial global currency, and comprises more than 60% of all known central bank foreign exchange reserves worldwide.

Stability and portability help explain how dollar-denominated investment and insurance products facilitate a faster claims process: these products are less prone to foreign-exchange fluctuations, making valuation, calculation, and payout of claims a simpler and more efficient process.

“As well, UAE-based insurance providers have many years of experience processing and paying out claims in foreign countries, streamlining the claims process even further,” Nair said.

The portability of dollar-denominated plans means it will be easier for investors to access high-quality medical care, whether in the UAE or anywhere else in the world, should he need to seek treatment for critical illnesses.

Reallocation strategy

Investment advisers also recommend a reallocation strategy by which NRI investors shift their investments to different portfolios such as migrating to debt funds or switch to US-focused INR funds, as they performed well in the past two years.

Jojo James, chief executive, Fosbury Wealth Managers, and partner of Tamim Chartered Accountants, Dubai, said NRI investors should adopt a reallocation strategy by shifting funds to safer avenues.

As the market outlook is grim, James says that those who have invested lump sum in equities or equity mutual funds will see their investment value depreciated when the markets are on a bad patch.

The extension deadline for the Brexit transition period has passed and it is certain that the UK will be leaving the EU in the new year.

Reassuringly – deal or no-deal – UK nationals lawfully settled in their chosen EU country before 2021 will have locked in the right to remain and enjoy uninterrupted citizens’ rights.

But there are still many unknowns.

Other than establishing residence, what steps should be taken to make the financial position as secure as possible?

Currency mix

It is common for UK expats to retain financial connections with the UK, such as property or bank accounts, with many preferring to keep their savings and investments in British pounds.

While there is comfort in the familiar, this does mean exposure to exchange rate risk.

Once expats are living in Europe and spending euros in daily life, it can become more expensive to take income in sterling.

Investment structures that offer the flexibility to invest and make withdrawals in different currencies should be explored.

UK investments 

Likewise, many expats favour British investments, such as UK corporate bonds or FTSE-listed shares.

This could especially be the case if they are still using a UK-based adviser.

If so, their financial planning may actually be better suited to a UK resident than to someone in their situation.

Note also that UK advisers may not be authorised to continue advising an EU resident after the transition period.

Diversification

Achieving higher returns in today’s difficult conditions and low interest rate climate means looking further than bank savings and fixed interest investment options.

While market movements can be unsettling, those invested for the medium- to long-term in a well-diversified portfolio are best placed to see wealth grow over time.

Amid today’s economic uncertainty, it is more important than ever to make sure the portfolio is not overweight in UK assets and is suitably diversified.

Risk can be reduced – Brexit-related or otherwise – by spreading investments across regions, asset types and market sectors to limit exposure in any one area.

Tax planning

When it comes to the taxes expats pay in their country of residency, there is no reason for anything to change post-Brexit.

Their tax treatment is determined by the relevant double tax treaty that exists independently of the EU.

There are, however, some circumstances where taxation may be affected.

For example, once the UK leaves the EU/EEA, expats selling a home in Spain or Portugal to buy a British property will no longer be eligible for capital gains tax relief.

Or if they are living in France and hold UK bonds, they may lose beneficial tax treatment once the UK leaves the EU.

An adviser can recommend more tax-efficient ways to structure investments, such as a suitable EU issued assurance-vie that can also offer additional benefits such as currency flexibility.

Pensions

The UK leaving the EU is likely to mean that a transfer to a qualifying recognised overseas pension scheme (Qrops) is no longer an option.

But there are other pension transfer opportunities if a UK national is moving overseas.

This article was written for International Adviser by Jason Porter, director of specialist expat tax and financial planning firm Blevins Franks, which was recognised as the Best Adviser Firm – Europe at the 2019 Best Practice Adviser Awards, which are run in collaboration with Quilter International. 

The last poll from Yougov ahead of the 12 December 2019 vote puts the Conservatives at 43% across the country while Labour sits at 34%. The Liberal Democrats are third at 12%.

That would indicate the Conservative majority has fallen from 68 seats in November to 28 seats as voters head to the polls.

Columbia Threadneedle portfolio manager Alex Batten reckons if the results on Friday align with polls, GBP could move to $1.34-1.35. While markets have largely priced in a Conservative majority, they are still too scarred from past polling errors to price in the large lead currently projected in polls, Batten said.

‘Knee-jerk’ reaction if Conservatives don’t take a majority

Brooks Macdonald investment strategist Matthew Cady reckons sterling upside is limited thanks to market complacency about the Conservative lead in the polls.

“With a Conservative majority now the consensus, if Friday morning sees a different result, there could be a rush to exit sterling positions,” he said.

“A hung parliament could see sterling back down towards the low £1.20s against the dollar, with a risk of delays and the current EU-exit timetable of 31 January likely thrown into doubt.”

Hermes senior economist Silvia Dall’Angelo expects sterling to remain in its post-referendum $1.20-1.40 range. The pound could reach $1.35 on a Conservatives win or $1.25 or lower on a hung parliament, but both would be “knee-jerk” short-term reactions, she said.

Could sterling near parity with the dollar?

The unlikely event of a Labour majority was deemed by Waverton chief investment officer Bill Dinning to deliver a much stronger reaction.

He forecasts sterling will fall to approximately $1.05, equivalent to a 20% drop from $1.30, under a Labour majority and 5% falls if they pull together a minority.

While weak sterling has buoyed overseas earners in the FTSE 100 in the period after the Brexit referendum, Dinning anticipates 10% falls for the index in the case of a Labour majority because of the “existential challenge” its policies would represent.

The party is pledging to give workers seats on boards and a 10% stake in the companies for which they work. It is also planning to nationalise trains and utilities.

Positives from a strong Labour result

But many believe a Labour-led coalition would be positive for sterling because it would likely lead to a softer Brexit or no exit from the European Union at all.

Option pricing for GBP downside protection is modest relative to previous events such as the 2016 referendum and Theresa May’s deadline for Brexit in March, notes Ugo Lancioni, manager of the newly launched Neuberger Berman Macro Opportunities FX fund.

“While investors have largely been focusing on the short-term dynamics of the election, it is the final Brexit outcome and success in subsequent trade negotiations which will determine the outlook for sterling over the more medium to long term,” Lancioni said.

In a table for investors on the potential outcomes for the UK election, EFG Asset Management global head of research Daniel Murray said a Labour-led coalition would result in a rally, compared to a sell-off if voters support a Conservative minority at the polls.

Source: EFG as at 5 December 2019

‘No deal brinkmanship will be back again’

Brexit would weigh on sterling in the case of a Conservatives majority or a hung parliament, both of which could see the UK fall back on to World Trade Organisation rules.

Hawksmoor Investment Management last month shifted away from its underweight sterling position by increasing UK domestic equity exposure and switching overseas bonds to UK corporates.

But this will remain under review regardless of the election result, said senior investment analyst Ian Woolley.

“We are acutely aware that we have only one year to sign an EU trade deal: no deal brinkmanship will be back again next Christmas,” Woolley added.

The Conservatives have ruled out an extension to the transition arrangement meaning they have until the end of 2020 to negotiate a complex trade agreement. Labour has pledged to negotiate a customs union with the EU and put the deal to a final referendum.

Dall’Angelo described Boris Johnson’s one-year timeline for Brexit as “very ambitious” pointing out it took the EU and Canada seven years to negotiate their trade deal.

She said: “The idea that once a withdrawal agreement is reached, Brexit uncertainty will be over is a bit of an illusion, I think. Brexit will probably continue to remain one of the main drivers of economic performance and FX and equity performance in the next few years at least.”

Positioning for UK election sterling fluctuations

Architas is positioning for short-term sterling strength but is prepared for the currency to pull back as Brexit negotiations come back into focus, said investment manager Nathan Sweeney.

Like Dall’Angelo, he does not expect deadlines set out by the Conservatives to be met if they lead the next government.

On a positive short-term outlook for sterling, the Architas Multi-Asset Active Intermediate fund has reduced exposure to Lindsell Train UK Equity from around 6% to around 2% since the summer and to Evenlode Income from around 6% to around 3% over the same period.

Premier Miton multi-asset fund manager David Jane said they are hedging sterling where they can via forward currency contracts as they do not like to have exposure to binary events like the election.

The UK election scenario most supportive of the pound

According to Batten, the scenario that would be most supportive of the pound, but is also among the least likely, is a Conservative minority government propped up by the Liberal Democrats on the condition of a second Brexit referendum.

He said: “This seems very unlikely given Conservative opposition to second referendum but would be the most market friendly outcome and a move to 1.40 in short order would be reasonable.”

For more insight on UK wealth management, please click on www.portfolio-adviser.com

A robust and repeatable investment advice process should always start with understanding the key needs and objectives of your clients. Every client is different and when assessing suitability and building investment portfolios for your clients, it is important to understand their individual investment goals along with their attitude to risk.

There are many factors that need to be considered when constructing a portfolio for investors looking to invest internationally. As part of your portfolio construction and fund selection process, an important element that needs to be factored in is which currencies your clients are exposed to, the additional risk they provide and how they reflect on your clients’ risk profiles.

The impact of currencies on investments

Like most asset classes, currencies go up and down over time and these movements can have a significant impact on investment returns, both positive and negative. This is why choosing a currency should be an integral part of any investment decision and should be considered a risk. The greater the risk, the greater the potential for return which means that sometimes it may be beneficial to have some currency exposure.

One of the key questions is what happens to the value of the currency of a chosen fund. Many global funds tend to be denominated in USD, so when the value of the USD rises relative to the investor’s home currency, the value of their overseas assets goes up. On the flip side, if the value of the USD goes down, the value of the assets compared to the home currency will also go down.

How to mitigate the risks of currency

Investors who do not want to take currency risk have two options: either to invest in their own home markets using funds that are denominated in the home currency, or to ‘hedge’ their foreign currency exposure when investing in assets that are priced in currency other than their home currency. The decision on which option to go with should be based on each investor’s personal circumstances, risk appetite and their views on what will happen to the interest rates and exchange rates. Ultimately they need to ensure that they choose the most appropriate investment for them.

Over the long term currency hedging may offer some valuable protection especially in volatile markets or when the currency of the fund is appreciating and foreign assets of the fund expressed in that currency are worth less and less. However, this is not always the case and sometimes currency hedging can have a negative impact which may come from the additional hedging costs or from missed opportunities by giving away the appreciation of the currency of the funds’ assets.

As an example, so far this year GBP has been depreciating compared to USD. As a result of this, investors who have chosen to invest in GBP hedged share classes of funds which invest in a USD portfolio have been suffering as they hedged away the appreciation of the USD currency and paid for the hedging costs. If they had invested in unhedged share classes and exposed their investment to the currency exchange risk, the story could be different. However, as mentioned earlier, like most asset classes, currencies move up and down over time, impacted by many factors such as monetary policies and geopolitics.

This is why the impact of currency on the performance of a global portfolio over the long term should be considered as an integral part of any initial investment decision and reviewed as part of regular client discussions.

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