Indian vs US Stock Market: A Comparative Analysis

The US stock markets have always been an enigma to Indian retail investors. Some of the biggest companies in the world are listed there. Now, that there are various ways to invest in the US stock markets, directly and indirectly, So do a comparison study between the two and how they have performed in the last ten years. For the US markets, using the Dow Jones Industrial Average Index (DJI) as a proxy and for the Indian stock markets, using our very own BSE Sensex.

Compare and Contrast

To compare and contrast the following parameters:

• Performance in terms of returns
• Correlation between the two markets
• Volatility
• Top-performing sectors
• Valuations
• Size

Performance

In the last ten years, both the US and the Indian markets have generated a similar return for their investors. The DJI has generated a compounded annual return of 9.75% whereas the Sensex has generated a return of 9.70% in the last ten years. The returns in the first five years of the decade (2011-15) were also pretty similar with the US markets growing at 12.86% compounded annually whereas the Indian markets grew at 12.11% compounded annually. In the table below, you will find returns in each year for the last ten years:

In terms of yearly performance, the Dow Jones index has given a better return than the BSE Sensex in six of the last ten years.

Correlation

For the unversed, correlation is a measure of the mutual relationship (or lack of) between two variables. It basically indicates whether the two variables move together or move in opposing directions or have no relationship with one another.

A correlation coefficient of 1 indicates a perfectly direct relationship in which the two variables move together, a correlation of -1 indicates a perfectly inverse relationship and a correlation of 0 indicates that there is no relationship between the two variables at all.

I compared the monthly returns of the last ten years of the two indices and computed a correlation coefficient of 0.54. This indicates that there is a semi-strong relationship between the two markets and hence any diversification strategies must be handled with caution.

Furthermore, the correlation coefficient in the last three years has been 0.64 which indicates that there is a definite relationship between the two.

Volatility

What is volatility and why should you care about it? Volatility is the standard deviation of returns around its mean. It is a good indicator of how much the market moves up and down in the defined period (preferably short term).

A lot of long-term investors tend not to care about volatility but it is important because if you are involved in a highly volatile market then a market dip might compel you to sell early.

Hence volatility can work as a measure of risk. I once again looked at the last ten year’s returns while calculating volatility. The volatility of the Dow Jones Index was 3.92% whereas the BSE Sensex was considerably more volatile at 5.06% in the last ten years. On this evidence, it can be inferred that at least in the last ten years the Indian markets have been riskier while giving the same returns as the US markets.

Top Performing Sectors

If we look at the sectors which have the most weight in an index then that is a good indicator of which sectors have been growing the most in the economy. In the table below, you can find the top five sectors in that particular index by weight:

It is clear from the above table that financials dominate the Indian indices while US Markets favor tech firms.

Valuations

In terms of valuations, the Dow Jones industrial average has a PE Ratio of 16 whereas the Sensex has a PE ratio of 33.13. This doesn’t mean that the Indian market is overvalued and you should only invest in the US Markets. It essentially means that the market believes that the earnings of Indian companies will grow faster than US companies. Given that the Indian GDP has grown at a faster rate than the US GDP in recent years, this might not be an unreasonable expectation. In the last ten years too, profit after tax of Indian companies in the index grew 12.6% compounded annually against 11% compounded annual growth of US companies.

Size

In terms of size, there is no comparison between the two. The combined market capitalization of all stocks in the DJIA amounts to 8.33 trillion dollars, nearly 8 times the combined market capitalization of all stocks in the BSE Sensex at 1.16 trillion dollars. Given the size of the two countries, this shouldn’t come as a surprise.

Investing In US Markets vs Indian Markets: The Pros and Cons

“Never invest in a business you cannot understand”. An oft repeated quote from Warren Buffet, but one that perhaps takes different interpretations now as Indian investors warm up to investment opportunities outside the country – the USA, in particular. The intelligent investor would now rather understand the US market and begin his investment journey there as well, instead of skipping the market for exclusively domestic opportunities. After all, investors are often advised to diversify their investments geographically by investing in both national and international markets.

US investing is often sold by statements such as “The US indices have outperformed Indian markets by 8-15% in the last decade”. But if investors give into such statements on face-value and expect the same level of performance in the future, they’re likely to be met with disappointment. Past performance is no guarantee of future returns, after all.

Both the Indian and the US markets have their advantages. But in a modern investing climate with access to the international market, it’s easy to see how US markets show more promise. This is in part due to their global affinity and nature, as well as the fact they host some of the most promising companies in the world. While the Indian market should certainly remain a significant part of an investor’s portfolio, there’s no denying that the US makes a strong case for a place in the Indian investor’s portfolio.

Difference Between Indian Stock Market and US Stock Market

Diversification

The US Stock Market not only lists companies in the US but also various companies across the globe. All the major US Stock Market indices have companies listed from various parts of the world. A countrywide emergency might drag the index down. However, the impact would be very little. On the other hand, in India, Indian companies dominate Indian indices. Even slight unrest in the country can lead to a steep fall in the indices. The US Stock Market is diverse and has the capacity to withstand adverse conditions. However, one cannot say the same in the case of India.

Currency

In India, all investments are done in INR. While in the US, the investments are done in USD. The US Dollar is the most popular currency and is de facto global currency, though it doesn’t have an official title. Investments made in the US Dollar will yield a higher return as the rupee has been depreciating against the Dollar for the long term. With appreciation in the Dollar, the investments grow even though the portfolio is unchanged. Hence, investing in terms of Dollar will yield a higher return than investing in Indian Rupee.

Volatility

The market volatility of many global markets is comparatively lower as opposed to the Indian markets. In other words, in a long term scenario, the market volatility of the US stock market is lower than the Indian stock market. Indian markets have experienced bigger swings. Hence, a good diversification strategy is to invest across the globe. Also, investors who invest globally can expect their portfolio to move differently as opposed to the Indian markets.

Global Factors

The Indian market rules are comparatively more stringent than some global markets. In India, start-ups are thriving, while the US market continues to host most of the major corporations across sectors. As per Indian laws, a company has to earn profits for three consecutive years to go public. Most investors miss the opportunity to invest in these early-stage companies due to these reasons. On the other hand, the regulations and laws are slightly relaxed in the US. This implies that the investors can invest globally and participate in the journey of many innovative models. For example, Facebook, Amazon, Tesla, etc., are some businesses that have proven the strength of the US markets.

Investing in such stocks is a crucial decision for an investor as these may evolve into great opportunities. Hence, the US markets are more promising as it opens the global exposure and allows investors to invest in some of the best companies in the world.

Research

While investing across different geographics requires the skill set to conduct research. The economies of each country differ, and also there are other global factors that influence the markets. Therefore, as an investor, it may be time-consuming and daunting to track different markets. Also, one must keep themselves up to date on various factors that may impact the stock market. When it comes to an understanding and effort, the Indian stock market has an advantage over the US stock market. Because of the extensive study required for the US markets, some investors may opt to forego the larger profit potential of investing in US equities from India.

Market Indices

Geographical diversification is one of the best ways to diversify one’s investment portfolio. And, investing in the US is the most popular option. The US indices have an even distribution across different sectors in comparison to the Indian stock market. Historically, the Dow index has beaten the Sensex over the five year and ten-year horizons. Furthermore, the Indian markets trade at higher multiples and offer low dividend yields in comparison to the US markets. However, both markets have given decent returns in the past and look lucrative for the future as well.

Reasons To Invest In India

1) Bank Interest Rates

In India, your bank interest rates can be as high as 8% depending on various factors. In the US, however, interest rates are much lower. The account you use to invest money from will earn higher interest in India – though you still have to weigh in other factors

2) Regulatory Policies

The US market is heavily regulated and understandably aids US citizens more than international investors. In India, you will be more cued into regulatory changes and are less likely to miss important finance news items

3) Conversion Loss

Converting currency from INR to USD and then back will not be free of cost. So while you may earn in dollars you can never entirely account for what the conversion rates will be when you move your money

4) Scope For Growth

India being a developing market has a lot more scope for growth than more mature markets. This can be a deciding factor for investors who already have funds abroad as well

5) Easy Liquidity

It is easier to liquidate your funds whenever you need the money if you’ve invested in the Indian stock market. This, of course, depends on the type of investment you’ve invested in

Benefits of Investing in the US Stock Market

1) Create A Nest Egg

Investing in US stocks and funds can help if you ever plan to live in America, have family there or plan to send your children there to study. You participate in a mature economy and also earn interest in dollars

2) Hedge Against The Rising Dollar

Investing in the US helps you protect your wealth from the rise of the US Dollar which has appreciated by ~5% on an annualised basis. This way you can ensure your wealth does not get eroded even if the rupee falls.

3) Invest In Popular Companies

U.S based companies such as Facebook, Google, Amazon, Nike, etc are names you trust and brand you understand. You will, therefore, be able to become a small part of their growth.

4) Geographical Diversification

America’s GDP is 10 times as much as India’s and US-listed companies account for almost 35% – 40% of the world’s market capitalization. By diversifying your portfolio there you can create a well-rounded portfolio.

5) Historical Performance

The US market has historically outperformed the Indian stock market. Based on that alone, many find it more encouraging to invest in the US.

How to Invest in US Stock Market from India?

• Opening an account through your banks

Many banks offer the service of opening a trading account. You can open your trading account with your bank. Many banks have tie-ups with foreign brokers with which you can begin your foreign investment journey. This process of opening this account is hassle-free and instant. Once you submit the online application your account with the partner broker will be activated in 2-3 days.

• Open an account with stock brokers

You can also directly open trading accounts with brokerage firms which will help you invest in the US market. From getting clearance from RBI to open right bank account in the US, these brokers help you to enjoy seamless trading. Once the US stocks account is opened, you are just few clicks away to trade globally.

• Investing through new apps

The availability of new apps which let you invest in the international share market has also made foreign investments easier. These apps charge only basic account opening fees and there are no limitations of minimum fund requirements. In addition to this, some features let you track your portfolio without any hassle.