On the face of it, both the Indian stock market and the US stocks are doing well. The Nifty 50 crossed 16000 for the first time and looks to gain further ground. While the Sensex, representing top 30 Indian stocks, is up by nearly 42 per cent over the last 12 months, the Dow 30, the barometer of the US economy, is up almost 31 per cent over the same period. Deep down, there are ample opportunities in the broader market of both the economies.
However, looking at returns over 1-3 years may not be the right approach and any correlation should be considered over a longer time frame. The US economy, on the back of its inherent strength, is known to have a boosting effect on the global economy. The US Federal Reserve has been taking adequate measures to ensure the US economy is not only on track to its pre-Covid levels but is also in a position to meet the growing demand in the post-Covid world.
If you as an Indian investor are looking only at opportunities in the domestic market, you run the risk of not holding a well-diversified portfolio. Not only in terms of portfolio returns, there’s a currency play as well, which you can take advantage of. “There is a high correlation between the Indian Markets and the US Markets in local currency terms in both the short term and the Long term. However, in constant currency terms the Indian Markets have lagged the US markets as the INR depreciation has impacted the performance of the Indian Markets negatively,” informs Ashish Ranawade, Head of Products, Emkay Wealth Management
A low correlation certainly makes the case for an Indian investor to invest abroad. “The correlation between the US and the Indian market (adjusted for foreign exchange rate) has been between 0.1 and 0.2 over the last 20 years. This is important to note because, lower the correlation, higher is the diversification providing stability in a portfolio,” says Anup Bansal, Chief Investment Officer, Scripbox
If you are building a long term portfolio of stocks, geographic diversification especially in US stocks brings in the necessary stability to your returns. Holding big-tech stocks of Nasdaq 100 or small and mid-cap stocks in Russell 1000 and Russell 2000, the opportunities are plenty in US markets.
As can be seen in the graph below, there’s a low correlation between India and US equity markets. The graph shows the returns over the almost 10 years period of Russell 1000 Growth index in US markets and Nifty 50 in India. Combining investments with low correlation improves portfolio efficiency and diversification for the investor.
Source: IDFC Mutual fund
Russell 1000 Growth index considered as investment in US markets and Nifty 50 as investment in India. Both the indices have been rebased to 10,000 on Dec 2011 to arrive at the above rolling returns. Data as on 30th June 2021
The best part of diversifying across boundaries is to avoid any bad surprises as far the economic situation of a single economy is concerned. While both, Indian and US economies have a strong future ahead, diversifying helps in keeping risks in control. “In the end, investing in the US market is a good strategy for International exposure and diversification. It should be done with a long-term time frame in mind and a risk management process in place,” adds Bansal.