Indian Market Outperformance: Myth or Reality

We have been long thinking that low risk anomaly that works so well over a period of time across the markets, how come more volatile/risky emerging markets (i.e. India) have been outperforming their less volatile counterparts (i.e. US) or at least that is the perception among majority of individual as well as institutional investors. We believe that if low risk anomaly prevails within a given market that should prevail across the markets as well. As we know, that global fund management industry follows a two-step process of portfolio management. At level one/ strategic level where funds are allocated across markets/country, considering every market as a stock based on perception/outlook about the expected performance of a market in future and what combination that maximize the benefit of portfolio diversification (i.e. India enjoys significant overweight position in emerging market/Asia/Global funds), at level two, fund managers are mandated to generate alpha buy taking active position in certain sectors/stocks such that each one of them contributes to alpha of the global portfolio without adding incremental risk.

For now, we focus only at level one/strategic level capital allocation, where every market is considered as a stock. We present here part of our major study spread across comparing performance of global markets by taking example of two know markets. We take Dollex-30 (dollar denominated Sensex) as a proxy to emerging/Indian market and DJIA as a proxy for developed/US market. Dollex-30 is an obvious choice as returns must be measured in common currency that is $. DJIA is a natural choice as a proxy to developed market as it consists of 30 stocks like Sensex.

We analyse the performance of Dollex-30 and DJIA in absolute and in risk adjusted terms for past 25 years. Our results are more surprising than what we suspect in the beginning. Our understanding was that Indian markets should outperform on absolute basis and underperform on a risk adjusted basis.


Dollex-30 has delivered CAGR of 6.94% compared to CAGR of 7.06%. This is a big surprise even for us. Lower absolute return from market like India that to in post 1991 era! Remember, these returns don’t include dividend yield. Considering the fact, that DJIA has much better dividend yield than Sensex, Indian market underperformance becomes even more evident. When it comes to risk adjusted performance, the difference is really substantial. Indian markets are close to two and a half times more volatile combing the effect of equity and currency market volatility on dollar denominated returns. The result is that the reward to risk ratio for DJIA is 0.46 compared to 0.18 for Indian markets. Pending any significant benefit by investing in emerging markets like India, and any potential tax arbitrage opportunities, the only reason, that can explain for a global investors (US investor in our case) to prefer Indian market over US market is the difference in skewness. Small positive skewness associated with Indian market returns compared to a negative skewness (we are not looking at statistical significant at the moment) associated with US market returns may attract investors to markets like India. Love of human being for lotteries and gambling is well known.

In closing, using this small anecdotal evidence, we highlight that the low risk anomaly is not restricted within a market at stocks level but prevails and persists at aggregate market level as well.

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