Indian Stock Market vs the US Stock Market—Know The Difference

Investors in India have always been enthusiastic about investing in the US market. Names like Alphabet, Meta, Amazon, Netflix, and Microsoft give an adrenaline rush to Indian retail investors. And there is absolutely nothing wrong with it; these companies have an excellent history and should be a part of anyone’s portfolio.

Now that it has become easier than ever to invest in the US markets by creating online trading account, let us discuss the key differences between the Indian Stock Market and the US Stock Market.

Performance

Year DJIA Sensex
2016 20.02% 7.06%
2017 24.44% 23.14%
2018 -10.79% 0.29%
2019 14.16% 13.78%
2020 6.70% 12.14%

The above table shows that Dow Jones Industrial Average (DJIA) has beaten BSE Sensex 4 out of 5 years.

Correlation

Correlation is a statistical calculation that shows the relation between two variables, that is, to what extent are the two variables related.

A correlation coefficient of 1 indicates a straightforward relationship between the two variables; for example, if A moves by 1%, B will also move by 1%. A correlation coefficient of -1 indicates a perfectly indirect relationship between the two variables; for example, if A moves up by 1%, B will move down by 1%. 

If we compare the correlation between both stock markets, the correlation is above 0.5, indicating a less diversification benefit.

Top Sectors

DJIA Sensex
Tech Financials
Industrials (Cyclical) Tech
Financials  Oil and Gas
Pharma and Health FMCG (Defensive)
Consumer Discretionary  Auto

It goes without saying that tech is one of the best performing sectors in the US whereas financials are the bigshot companies in India. The FAANG (Facebook (now Meta), Amazon, Apple, Netflix, and Google (now Alphabet)) stocks of the US are behemoths and are leading the world with their technological advancements.

Volatility

Volatility is the rate of change of stock prices—the greater the volatility, the higher is the risk and vice-versa. For example, whenever marquee events are happening in any country, including the elections, RBI policy, and warlike situations, the volatility increases, and thus it depicts higher risk. 

While long term investors do not care about short term volatility, traders get concerned about the rising volatility in the market.

Since Indian markets are developing, there is always a more significant risk. Since volatility is a measure of risk, over the last five years, Sensex has had higher volatility than the US markets.

Valuations and Growth

A developing market always grows higher than a mature market. Hence, the valuation is relatively higher for Sensex than DJIA. The estimated PE of DJIA is ~17, whereas Sensex has a PE of ~25 at the moment. This does not mean that Indian markets are overvalued. Since India is one of the fastest-growing economies globally and cannot be compared with the growth of a developed nation, the valuation differential will always be there.

Size 

DJIA has a market capitalisation of 10.84 trillion dollars, whereas Sensex stands at 3.7 trillion dollars. This, again, is not comparable.

Conclusion

To conclude, both markets have pros and cons, but what matters is where you invest. Where the US is more of a tech-dominated industry, India is a sum of financials, industrials, and healthcare. So, online investing boils down to one’s investment objective over the long run.

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