High Price or Wide Acceptance: Whatever floats your boat

Iraq invaded Kuwait in 1990 and devastated the economy of the tiny oil-rich country. Under pressure from the international community Iraqi forces exited Kuwait 8-months later after setting fire to 600 oil fields and laying waste to the rest of the country. In the aftermath of the Gulf War, Kuwait bounced back and today its currency the Kuwaiti Dinar (KWD) is the most valued fiat currency in the world today. 1 KWD is equal to INR 267.69. At the risk of over simplifying things to one criterion, being the most valued currency, the KWD should also be the most accepted currency world-wide for trade and commerce after all it is backed by the wealth of Kuwait’s oil rich economy, and the predominance of the oil-trade in the world economy cannot be understated.

However, the status of the most widely accepted currency globally goes to the US Dollar (USD). 1 USD is equal to INR 82.35. ?The KWD therefore offers over 3 times more value than offered by the USD. The reason for the wider acceptance of the USD compared to KWD can be attributed to a combination of historical, economic, and geopolitical factors such as:

Economic Influence: The United States has the world's largest economy and is a major player in global trade and finance. Its economic influence, along with the stability of the US financial system, has contributed to the widespread acceptance of the US Dollar. The stability and liquidity of the US Dollar make it a reliable medium of exchange in international transactions.

Reserve Currency Status: The US Dollar has been designated as the world's primary reserve currency for decades. Many central banks around the world hold significant reserves of US Dollars, which adds to its widespread acceptance e.g. the Indian government has over $220 billion invested in US government securities and is the 11th largest holder of US government securities in the world. International trade is predominantly conducted in USD, and it is the currency of choice for many global transactions.

Petrodollar System: The petrodollar system further solidifies the dominance of the US Dollar. Most oil transactions worldwide are denominated in USD. As oil is a vital commodity globally, the demand for US Dollars remains high, creating a continuous need for dollars in international trade.

International Investment and Financial Markets: The US has a highly developed and liquid financial market, attracting significant foreign investment. Global investors find it convenient to hold and transact in US Dollars due to the depth and breadth of these markets. The US Dollar's status as a safe-haven currency during times of global economic uncertainty also enhances its acceptance.

Stability and Trust: The stability of the US economy, the rule of law, and the independence of its central bank, the Federal Reserve, have instilled confidence in the US Dollar. Investors and businesses prefer currencies that offer stability and maintain their value over time, making the US Dollar a reliable choice.

On the other hand, the Kuwaiti Dinar, while highly valued, has a relatively smaller economy compared to the United States. Kuwait's currency is backed by its significant oil reserves, and its high value reflects its oil wealth. However, the Kuwaiti Dinar is not as widely circulated or accepted outside of Kuwait due to the country's smaller global economic footprint and influence.

Taking a vein from the currency market, a similar principle is seen in application where equity markets are concerned. Stocks which are part of well know benchmark indices such as the Sensex or Nifty50 (in the case of Indian markets) see wider acceptance by both domestic and international investors. There are many highly priced reputed stocks in the market trading at prices which are higher than stocks on the benchmark indices, but since they are not part of benchmarks such as Sensex or Nifty50 their acceptance among institutional investors is lacklustre. Every time a stock exits these benchmarks their acceptance falls in institutional investor portfolios though their price may not have seen any significant change.

Some stocks though high priced may not be part of the benchmark since they may not fit into certain selection criteria of the benchmark like representing a key sector of the economy or not have the required number of freely traded shares. These criteria otherwise don’t have any effect on the value of the stock. A prime example is MRF (a leading tyre manufacturer) with stock price of ~INR 96000 (2nd June 2023), is the most expensive stock in the Indian stock market. MRF, a reputed company may never find a place in either Sensex or Nifty50 due to low float of stock, meaning there is a low quantity of stock available for the general public to buy because existing investors control most of it.

While there are merits to both high priced stocks and widely accepted stocks, as an investor in mutual funds you have access to both categories of stocks along with the expertise of professional fund managers. Plan for your financial goals and invest to achieve them. The more time you give your investments in equity markets the more the potential for wealth creation in the long run.

Note: There are logical flaws in this article - a penny for your thoughts.

Author: Ashish Joseph George, MMS, CFP. The views shared in this article are my personal views and don’t reflect the views of any organization. This is not an investment advice.