High Geographical Allocation: Is it Worth the Risk for Your Portfolio Now?

Diversification is a basic tenet of investing.

But when you are spoilt for choices and various investing narratives float around, you should adopt caution and not get carried away.

While the year 2025 started with much optimism, it has been a rollercoaster ride for equity investors.

The protectionist policies of Trump 2.0 -- reciprocal tariffs on several countries, sanctions on India for importing Russian oil, technological restrictions on China, stricter immigration rules, increase in H1B visa fees -- have contributed to the global equity market volatility.

It is feared that many of these policies may cause supply chain disruptions, a rise in inflation, cause fiscal and debt concerns, weigh down economic growth, and keep geopolitical tensions simmering.

The RBI has observed that prolonged geopolitical tensions and volatility in international financial markets caused by risk-off sentiments of investors pose downside risks to the growth outlook.

But despite bouts of volatility amid macroeconomic and geopolitical uncertainty, equity markets around the world have remained buoyant. Markets in Europe, the US, as well as China, have all posted double-digit returns so far.

How Have Global Equity Markets Performed?

*Data as of 7 November 2025
Source: ACE MF

The Indian equity market, although it has posted positive returns, has lagged its global peers.

Some of the reasons are the adverse impact of US tariffs, foreign portfolio investor (FPI) dumping Indian equities, a vulnerable Indian rupee, and the stretched valuations of the Indian equity market.

The Morgan Stanley Capital International (MSCI) India Index trail PE is currently almost at 27, way higher than the MSCI Emerging Markets Index and MSCI World Index trail PEs, which are around 17 and 25, respectively.

Even on a 12-month forward PE, the MSCI India Index, with a PE of nearly 22, is higher than the world and emerging markets PEs that are around 21 and 14, respectively.

The fact is that corporate earnings have slowed down and there have been earnings downgrades over the past 12-15 months.

Tariffs are likely to have an impact on the earnings of companies exporting to the US. In such cases, companies with high debt may find it challenging to repay it.

In the Indian banking system, there are already concerns about new NPAs building, as consumption and growth are driven by easy access to credit.

Does Geographical Allocation Make Sense?

One needs to approach the global equity market cautiously and not merely go by the historical returns.

In the latest report, the International Monetary Fund (IMF) has observed that financial stability risks remain elevated amid the risks presented by stretched asset valuations, growing pressure in sovereign bond markets, and the increasing role of non-bank financial institutions.

Despite its deep liquidity, the global foreign exchange market remains vulnerable to uncertainty.

At present, the global markets are too complacent about risks, including trade wars, widening government deficits, and geopolitical tension. They appear to be downplaying the potential effects of tariffs on growth and inflation.

There is also the investor-fancy for AI stocks - Nvidia, Tesla, Microsoft, Alphabet, Apple, Meta, Amazon, popularly called the magnificent seven.

However, these account for a disproportionately large share of the market capitalisation of the S&P 500 and NASDAQ-100 indices, which means that there is a concentration risk that has built in.

If these mega-cap stocks fail to generate returns to justify their current lofty valuations, it could trigger deterioration in investor sentiment and make the stocks susceptible to sharp corrections.

IMF staff model valuation models indicate that risk asset prices are already well above fundamentals, and there is an increasing probability of disorderly corrections when adverse shocks occur.

While the sovereign bond market has been largely stable so far, widening government deficits may impact their bond market functioning.

The IMF highlights that bond market functioning could be tested if yields rise abruptly. This is because core sovereign bonds serve as benchmarks and collateral. Deterioration in the bond market has implications for the broader financial markets.

Beneath the calm surface, the ground is shifting in several parts of the financial system, giving rise to vulnerabilities, the IMF has expressed in its bi-annual Global Financial Stability Report.

What Should Investors Do?

While the Indian equity market is commanding a premium, the PE of the S&P 500 at 28 (as of 7 November 2025) does not look reasonable either. It is way above the rolling 5-year and 10-year averages of 22 and 20, respectively.

Shiller PE of S&P 500 is Noticeably Above the Long-term Historical Average

The Shiller PE ratio (named after American economist Robert J. Shiller) of the S&P 500 considers the cyclical adjusted price-to-earnings.

It's used to assess likely future returns from equities over timescales of 10-20 years, and is currently at 40. It had touched such a level during the dot-com bubble.

The US economy is expanding at a bit above 2%. To support growth, the US Fed cut interest rates by 25 basis points (bps) in the October meeting.

However, whether it would go for another rate cut in the December 2025 meeting remains to be seen, given that headline inflation in the US has moved up and is above the target of 2%.

In the Eurozone, the GDP rose 1.3% in Q3 2025, above expectations of 1.2% which has led some equity markets to perform well.

And the better-than-expected figures ease pressure on the ECB to cut interest rates in the near term, supporting the view that the economy remains resilient despite geopolitical tensions and trade policy uncertainty.

Among the BRICs, India is a bright spot - reported a GDP growth of 7.8% in Q2FY26 - compared to China (4.8% GDP growth in Q3 2025), Brazil or Russia.

Moreover, India has managed its debt better (than advanced economies and middle-income countries), has walked on the fiscal consolidation path, has a strong external and corporate and external balance sheet, appropriately taken monetary policy actions and stance.

For this reason, the country's ratings have been upgraded to 'BBB' (from BBB-) by S&P, an international credit rating agency.

Given the above and the fact that long-term economic growth prospects for India seem promising, with numerous reforms being rolled out and a favourable demographic dividend, India should remain a part of your core equity allocation.

However, remember that the equity market goes through cycles, and hence you need to have a longer investment horizon instead of giving much weight to short-term performance.

At a time when volatility in the market could get intense, make systematic investments.

It may prove meaningful to have higher exposure to largecaps instead of smallcaps and midcaps. Valuations in smallcaps and midcaps seem a bit frothier than largecaps.

So these stocks can be a small portion of your portfolio now, provided you have an investment horizon of 7-8 years or more. The largecaps shall add stability while you endeavour to build wealth over the long term.

For geographical allocation, only about 5-10% may be held in some of the best international mutual funds - but only after your core India allocation is set right with appropriate stocks and mutual funds.

For tactical asset allocation to equity, debt, and gold, investing in some of the best multi-asset allocation funds may be considered.

Ensure that while geopolitical tensions loom, your portfolio is not vulnerable to undue risks.

Invest sensibly with discipline and be a thoughtful investor.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a recommendation and should not be treated as such.