Indian vs US Stock Market: A Comprehensive Comparative Analysis

The world of investing is vast, and for many Indian investors, the allure of the US stock market has grown stronger in recent years. With easier access to international markets, it's natural to wonder how the Indian stock market stacks up against its American counterpart. Let's comprehensively compare these two markets, exploring their unique characteristics, performance, and what they offer to investors.

Performance of Indian and US Stock Markets

When we look at the performance of the Indian and US stock markets over the past decade, we see an interesting picture. Both markets have delivered similar returns but with some notable differences along the way.

Let's use the BSE Sensex as our benchmark for the Indian market and the Dow Jones Industrial Average (DJIA) for the US market. Over the last ten years, both indices have shown comparable growth. The DJIA has grown at a compound annual growth rate (CAGR) of about 9.75%, while the Sensex has achieved a CAGR of around 9.70%.

However, when we break it down year by year, we see some variations:

As we can see, the US market outperformed the Indian market in six out of these ten years. However, it's important to note that past performance doesn't guarantee future results. Both markets have shown resilience and growth despite various economic challenges.

Correlation in Indian and US Stock Markets

Understanding the correlation between the Indian and US stock markets is crucial for investors looking to diversify their portfolios. Correlation measures how closely two markets move about each other.
A correlation coefficient ranges from -1 to 1. A value of 1 indicates that the markets move in perfect sync, -1 means they move in opposite directions, and 0 suggests no relationship.

Over the past decade, the correlation coefficient between the monthly returns of the Sensex and the DJIA has been about 0.54. This indicates a moderate positive relationship between the two markets. In simpler terms, when one market goes up, the other also tends to go up, but not always to the same degree.

Interestingly, this correlation has strengthened in the last three years to about 0.64. This could be due to increased global economic integration and the impact of common factors like the COVID-19 pandemic, which affected both markets similarly.

For Indian investors, this moderate correlation suggests that investing in US stocks can offer some diversification benefits. However, it's not a perfect hedge, as both markets still tend to move in the same direction more often than not.

Volatility in the Indian and US Stock Markets

Volatility measures how much a market's returns fluctuate over time. It's often used as a proxy for risk – higher volatility generally means higher risk.

The data from the past decade shows a notable difference in volatility between the Indian and US markets. The Sensex has shown a volatility of about 5.06%, while the DJIA's volatility was lower at around 3.92%.

What does this mean for investors? While the Indian market has offered similar returns to the US market over the long term, it has experienced more ups and downs along the way. This higher volatility could lead to more short-term fluctuations in portfolio value, which might concern risk-averse investors.
However, it's important to remember that higher volatility can also present opportunities for active investors who can

tolerate short-term market swings. The key is aligning your investment strategy with your risk tolerance and goals.
Top Performing Sectors in the Indian and US Stock Markets

The sector composition of a stock market can give us insights into the broader economy and where growth is happening. Let's look at the top sectors in both markets:

Indian Stock Market (BSE Sensex):

1. Financials (41.95%)

2. Information Technology (14.87%)

3. Oil & Gas (11.86%)

4. Fast-Moving Consumer Goods (FMCG) (11.06%)

5. Automobiles (4.93%)

US Stock Market (Dow Jones Industrial Average):

1. Information Technology (22.4%)

2. Industrials (18.2%)

3. Financials (15.2%)

4. Healthcare (13.1%)

5. Consumer Discretionary (12.9%)

The differences are quite striking. The Indian market is heavily dominated by the financial sector, which makes up nearly half of the Sensex. This reflects the importance of banks and financial services in India's growing economy.
In contrast, the US market shows a more balanced distribution across sectors, with technology leading the way. This diversity can be attractive to investors looking for exposure to various industries.

The prominence of technology in the US market is particularly noteworthy. It reflects the global dominance of American tech giants like Apple, Microsoft, and Google. For Indian investors, the US market offers a way to gain exposure to these world-leading tech companies that aren't as readily available in the Indian market.

Valuations of the Indian and US Stock Markets

When comparing stock markets, valuations are crucial. One common measure is the Price-to-Earnings (P/E) ratio, which gives an idea of how expensive a market is relative to its earnings.

As of recent data, the Sensex had a P/E ratio of about 33, while the DJIA had a P/E ratio of around 16. At first glance, this might suggest that the Indian market is significantly more expensive than the US market.
However, it's not that simple. A higher P/E ratio can also indicate that investors expect higher future growth. Given India's status as a developing economy with a young population, there's an expectation of faster economic growth compared to the more mature US economy.

Indeed, over the past decade, the profits of Sensex companies have grown at a compound annual rate of about 12.6%, compared to 11% for DJIA companies. This higher growth rate helps justify the higher valuation to some extent.
For investors, this means that while Indian stocks might seem more expensive, they come with higher growth expectations. US stocks, on the other hand, might offer more stability but potentially lower growth prospects.
Size of Indian and US Stock Market

India's stock market is experiencing significant growth. While ranking fifth globally with a market capitalisation of about $5 trillion, it's projected to reach a staggering $10 trillion by 2030. This rapid expansion positions India as a promising market for investors.

However, the U.S. still dominates the global stock market with a massive market capitalisation of $50.8 trillion. This substantial difference reflects the maturity and size of the U.S. economy.

For Indian investors, this disparity presents a complex landscape. On one hand, the vast U.S. market offers diverse investment opportunities. On the other, India's growing market holds the potential for higher returns due to its rapid economic development.

Investing In US Markets vs Indian Markets

Given our discussion, should Indian investors stick to their home market or venture into US stocks? There's no one-size-fits-all answer, but here are some points to consider:

● Diversification: Investing in both markets can provide better diversification, as they don't move in perfect sync.

● Growth potential: While the Indian market offers exposure to a fast-growing economy, the US market provides access to global leaders in technology and innovation.

● Currency factor: Investing in US stocks means exposure to the dollar, which could be beneficial if the rupee depreciates against the dollar.

● Familiarity: Indian investors might find it easier to understand and follow Indian companies and economic trends.

● Costs: Investing in US stocks might involve higher transaction costs and potential tax implications.
The best approach for most investors might be balanced – maintaining a core portfolio of Indian stocks while allocating a portion to US stocks for added diversification and exposure to global trends.

Conclusion

Both the Indian and US stock markets offer unique opportunities and challenges for investors. By understanding the characteristics of each market, investors can make more informed decisions about where and how to invest their money. Remember, diversification across markets can be a powerful tool in building a resilient investment portfolio.