Indian vs US Stock Market: A Comparative Analysis

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 favour 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.

To Sum Up

In summary, US Markets have given slightly better returns as compared to the Indian Markets, and that too with less risk/volatility. However, whether you choose the Indian markets or the US markets for your investment objectives, be wary of the pros and cons of both to ensure the risk-return tradeoff is balanced. 

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