By Trivesh
The interconnectedness of global economies has never been more evident, and the relationship between the Indian and US stock markets is a prime example of this phenomenon. The link between these two major markets influences investment decisions, economic policies, and individual investor portfolios across the globe. Understanding how these markets interact can offer valuable insights for investors looking to optimize their strategies in an increasingly globalized financial landscape.
Indian elections and US Presidential elections
The Indian general elections and the US presidential elections have significant impacts on their respective stock markets. For instance, in India, the market reacts to the stability and policy directions signalled by the election outcomes. Similarly, in the US, the presidential elections influence investor sentiment globally due to the country’s substantial economic influence. A pro-business administration in the US often leads to bullish trends not just domestically but also in emerging markets like India.
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The US market influences the world
Indian general elections and US presidential elections significantly impact their respective stock markets. For instance, during the 2019 Indian elections, investor confidence in the continuation of economic reforms was reflected in the Sensex’s 623 point surge and the Nifty’s 187 point jump on results day.
Similarly, the 2020 US presidential election saw substantial gains in the U.S. stock market. The S&P 500 increased by 2.2%, or about 74 points, the day after the election, while the Dow Jones increased by more than 800 points following Joe Biden’s win, primarily due to expectations of fiscal stimulus and stable trade policies.
Indian and US stock market comparisons
Market size
The US stock market is significantly larger than the Indian stock market. The Total Market Capitalization of Indian Stock Market (BSE) is about $5 trillion, while that of US Stock Market is about $50.8 trillion.
Volatility
The Indian stock market has been slightly more volatile than the US. This higher volatility can mean higher risk but also potentially higher rewards for short-term investors and day traders. Long-term investors might find this less concerning, as price movements tend to average out over time.
Market performance
Level of diversification
In the Indian stock markets, the stocks listed primarily belong to Indian companies. In the US markets, however, there are a vast number of foreign companies listed, indicating a higher level of diversification. Investors diversify their portfolios effectively in the US markets. Although geographical diversification is more constrained in India than it is in US markets, you can still diversify your portfolio across sectors.
Correlation with the Indian stock market
The correlation between the Indian and US stock markets is evident, though it varies over time and circ*mstances. In general, there is a positive correlation, which means that the Indian market frequently rises in tandem with the US market. This correlation, meanwhile, is not perfect and may be impacted by regional variables in India.
Indian traders scan the US market pre-open for clues
The Indian traders analyze the prior day’s closing movements of major US indexes like the Dow to gauge overall sentiment. Sector performance is also key, as a strong US tech day might signal a similar rise for Indian IT stocks. News and events that hit after India’s close but during US trading hours are crucial, as they can be economic reports or geopolitical tensions that impact global markets. Finally, pre-market activity in US stocks offers hints about investor sentiment ahead of the official opening bell.
US market’s impact on the Indian economy
Investment flows: US investors often look towards emerging markets like India for diversification. A bullish US market often leads to increased FDI and FII in India, boosting capital inflows and economic growth. For instance, in 2020, despite the COVID-19 pandemic, the US stock markets saw significant rebounds due to aggressive fiscal and monetary policies.
Global trade: The USA is a major trading partner for India. Economic health reflected in the US stock markets can signal demand for Indian exports. A strong US economy typically boosts Indian exports, benefiting sectors like IT, textiles, and pharmaceuticals.
Economic policies: In December 2015, the US Federal Reserve raised interest rates for the first time in nearly a decade. This policy change led to outflows of foreign investments from emerging markets, including India, as investors sought safer returns in the US. US Federal Reserve policies, often influenced by stock market conditions, affect global interest rates.
Currency fluctuations: The US dollar’s strength or weakness influences the Indian rupee. A strong dollar generally leads to a weaker rupee, affecting trade balances and corporate earnings in India.
Companies prefer to list in India
Indian tech startups are increasingly choosing to list domestically rather than in the USA, a trend known as reverse flipping. India’s strong economic growth, government policies that are supportive, and the allure of the local capital markets are the main drivers of this change.
Should we prioritize Indian or US stocks?
Deciding whether to prioritize Indian or US stocks depends on various factors, including investment goals, risk tolerance, and market outlook. US stocks generally offer more stability and are part of a more mature market, providing safer investment opportunities. On the other hand, Indian stocks can offer higher growth potential, albeit with increased volatility. A balanced approach, including diversifying investments across both markets, can help manage risk and maximize returns.
(Author is COO, Tradejini)
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