Indian stock market vs US stock market | Aleena Rais | Stock market for beginners - YouTube

“Never invest in a business you cannot understand”.

An often-repeated quote from Warren Buffet.

But it has different interpretations now as Indian investors warm up to investment opportunities outside the country – the USA, in particular.

A lot of investors wonder how to invest in US Stocks from India.

At the same time, others ask if it’s better to invest in India or if they should consider US markets.

While investing in US stocks and funds makes sense for some of us, many may be happier investing in India alone.

In today’s video, we will compare the Indian stock market with the US markets.

For the US markets, have taken the Dow Jones Industrial Average Index (DJI) as a proxy and for the Indian stock markets, used BSE Sensex.

So, let's compare both of them based on some key parameters.

Correlation is a measure of the mutual relationship between two variables.

It indicates whether the two variables move together or move in opposing directions or have no relationship with one another.

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 any diversification strategies must be handled with caution.

Viram Shah, co-founder, and CEO of Vested Finance tells the advantages of investing in the US market

That investing in US stocks gives you exposure to the United States but also to the world.

As many companies have global operations but are listed there.

“What’s interesting about US stocks is that you not only get exposure to the United States but also to the world, as many companies have global operations but are listed there.”

Currency- Take the Indian Rupee – which has witnessed a consistent decline in value against the American Dollar.

This is a major con because all investments made in the Indian markets are in INR, which means they decline in value over time.

In this year alone, the dollar is up 6% against the rupee.

Investing in US markets you get capital appreciation along with Dollar vs India rupee price benefits.

Volatility. 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.

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.

To conclude, it can be said that in the last ten years the Indian markets have been riskier while giving the same returns as the US markets.

The US markets are less volatile in the long run.

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 10 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.

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

While profit after tax of US companies grew by 11% compounded annual growth.

Keep in mind US markets are matured markets while Indian markets are still growing.

Even Indian governments allow a monopoly in business, but no monopoly in business is allowed by the US government.

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.

It is 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.

Lastly, let's sum up the key parameters.

Annual returns show a very low correlation between the two markets - Price comparison over the past 10 years shows a correlation of 0.36.

Low correlation is a major reason why Indian equity investors need to diversify abroad.

Financials dominate Indian indices; US markets favor tech firms - US markets exhibit comparatively more even distribution between sectors.

Frontline Indian index is more expensive than US - Indian market continues to trade at higher multiples and offers lower dividend yields.

Indian companies have delivered higher earnings growth - Leading US firms have clocked lower profit growth as these have already reached a much larger scale of operations.

The global liquidity infused by the US Fed after March 2020, the stock market indices have conquered new heights because of their strength.

Global events like inflation, interest rates, Fed reserve policies, etc. have to be considered when investing overseas.

Growth rates across various geographies have to be tracked.

Currency movements affect these companies - margins & profitability along with the investor who is investing in these companies.

For a growing number of Indian investors, the US is fast becoming the first choice for global investing.

From individual stocks to ETFs, the US stock market provides various opportunities for all- traders, beginners to long-term investors.

Stocks and ETFs aren't the only way to invest in the USA.

You can even invest in international mutual funds that are available in India.

These mutual funds invest in US indices like the S&P 500 or other US mutual funds.

To know more about US & Indian stock market, subscribe to Groww & tell us in comments about your perspective regarding US & Indian markets.

Also, our videos are only for educational purposes and should not be treated as any kind of buy or sell recommendations.

Bye-bye.