By Aarati Krishnan

Copyright thehindubusinessline

Folks on social media have a knack for latching on to the wrong investment ideas at wrong times. The advice doing the rounds that Indian investors ought to go big on US stocks to avoid ‘losing money’ from rupee depreciation, is the latest example.

Their arguments are on the following lines.

# If you’ve earned an 18 per cent CAGR (compound annual growth rate) from your domestic equity funds in the last five years, don’t be too happy. After adjusting for rupee depreciation, your returns are just 13 per cent. The rupee has been losing 3-4 per cent against the US dollar for the last many decades. The only way to shield your portfolio from this is to invest in US markets.

# The AI revolution is sweeping the world. As AI replaces humans across industries, many Indian industries will be disrupted. Stay safe by investing in US Magnificent 7 companies.

There’s a grain of truth in each of these statements; but it’s no more than a grain. If you’re thinking of making a wholesale switch from Indian stocks to the US ones, look before you leap.

Investing a small portion of your portfolio in dollar-denominated assets to fund your overseas expenditure is a good idea. But this is a particularly bad time to replace your Indian equity allocations with US equities, hoping to earn a higher return or gain from dollar appreciation.

Risky dollar bet

Let’s first look at why Indian investors need to stick with rupee assets.

Buy what you know: Globally, even professional and institutional investors have a home-country bias. That is, they invest the bulk of their portfolio in assets denominated in the currency of their home country. US investors stick by dollar assets and Chinese investors prefer yuan-denominated assets.

This is quite simply because you get the best results from investing in what you understand. An Indian investor has a greater shot at understanding and tracking the Indian economy, consumers, companies and government policy, than the US economy, its consumers or government policy. When professional investors or institutions invest outside their home country, they think of this as a risk and hedge against it.

USD weakening: It is also dangerous to expect the dollar to deliver 3-4 per cent gains against the rupee like clockwork. Yes, over the last three decades, the rupee has lost ground against the dollar at a 3-4 per cent annualised rate. This is because India has consistently run a current account deficit and needed foreign capital inflows to fund it.

But there’s no guarantee that rupee depreciation will continue at this rate to perpetuity. If a shrinking current account deficit, a healthy economy, improving sovereign ratings or attractive stock valuations or bond yields woo back foreign investors to India, this can slow the pace of rupee depreciation. In fact, the dollar index is down 10 per cent since the beginning of 2025, on tariff turbulence and rate cut expectations. US policymakers are, today, keen to allow the dollar to weaken substantially, so that US exports can be made more competitive.

Mirror your expenses: The basic purpose of financial planning is to fund your future expenses. If your future expenses such as buying a home or setting up a pension fund are going to be in rupees, your investments need to be rupee-denominated too. Yes, rupee depreciation can indirectly peg up your expenses if imported goods such as crude oil, gold, industrial metals or edible oils get costlier. But all this gets captured in domestic inflation numbers. As long as you plan your investments to beat inflation, the currency impact on your daily expenses is taken care of.

You need dollar assets in your portfolio only to the extent of financial goals that will entail spending in dollars. If you plan to tour the US, enrol in a US master’s programme, pursue higher education for your child in American universities, that portion of your portfolio needs to be invested in dollar assets.

Shaky US markets

Switching from Indian stocks to US stocks today, based on valuation concerns, is akin to jumping from the frying pan into the fire. Here’s why.

* As the Indian market has enjoyed a breathless bull run since Covid, the US market has rallied right alongside it. In the five years to September 2025, while the Nifty50 has gained 120 per cent, Nasdaq100 Index is up 127 per cent and US S&P 500 112 per cent.

Yes, Indian markets have turned expensive after this rally with the Nifty50 at a 22 PE and the Nifty500 at 25. But then so has the US market, which now appears over-valued by most metrics. The Buffett Indicator (market cap to GDP) for the US hovers at 217 per cent against the fair level of 100 per cent. S&P index’ trailing PE of 26 times is well above the long-term average of 18. The forward PE of 25 stacks up against the long-term average of 17. Therefore, if Indian stocks can get derated on earnings disappointments, so can US stocks.

* After a post-Covid boom, the Indian economy has normalised to 6.5-7 per cent growth rate. The US economy is, however, on the verge of a sharp slowdown. Last week, US Fed members projected that GDP growth could slow down to 1.6 per cent in 2025 and 1.8 per cent in 2026 from 2.8 per cent in 2024. With government spending cuts, US jobs growth has fallen off a cliff in recent months with monthly non-farm payrolls averaging 29,000 in June-August 2025 against 82,000 same time last year. The impact of these job losses on consumer spending and the economy is yet to play out. It is hard to believe at this juncture that tariff flip-flops, job losses and the spending slowdown that follows will have no impact on US corporate earnings. Whether Fed rate cuts will make up for all this remains to be seen.

* Unlike the Indian government, which has been cutting back on borrowings post-Covid, the US has been binge-borrowing, with its debt at $37 trillion and debt-GDP ratio at over 120 per cent now. US bond market yields have been highly volatile in the last one year and are at present above the levels at which they were when the Federal Reserve started cutting rates in September 2024. Rising bond yields ratchet up the cost of borrowings for the US government and companies, and can spook capital flows. Global central banks have been diversifying away from the dollar into gold holdings in recent times.

* A popular argument for investing in US equities is that no other market offers the opportunity to own a piece of global hyper-scalers such as Microsoft, Alphabet, Meta, Nvidia and Amazon. This is true. The Magnificent Seven, thanks to their technological prowess and the global dominance of their platforms, have managed scorching growth rates in revenues, profits and cash flows over the past decade. In recent years, they have invested eye-watering sums in AI capex, building up hopes that rising AI adoption will drive the next leg of supernormal growth for these companies. It is thanks to these expectations that the market capitalisation of Magnificent 7 stocks has rocketed to $21 trillion, nearly five times India’s GDP. Just seven stocks now make up 34 per cent of US stock market capitalisation. Mag 7 stocks have belted out a 38 per cent CAGR in the last 10 years.

But after a decade of scorching earnings growth and even more scorching stock price performance, some market veterans are beginning to question if the hyper-scaler story has been stretched too far. There are worries about whether AI monetisation will lag capex, and if Mag 7 companies will end up decimating both their cash flows and shareholder returns in their pursuit of GenAI. Comparisons are beginning to be made to the infamous 1999-2000 dotcom bubble (See Big Story).

Therefore, Indian investors who need dollar exposures in their portfolio because of specific goals, should explore stocks outside the Mag 7 and gold at this juncture. Others should stick to Indian equities and bide their time on overseas diversification.

Published on September 20, 2025