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Dow Vs Sensex - Views on News from Equitymaster
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  • Sep 24, 2004

    Dow Vs Sensex

    In real life as well as in stock markets, we have a tendency to benchmark ourselves against the best in the business. Little wonder that when it comes to economic development, we look up to USA, a country that accounts for nearly one third of the world's GDP and is among the most developed in the world. While a lot of attempts have been made to compare US and India vis--vis various economic parameters, in this article let us see how our stock market index BSE compares with its US counterpart, the Dow.

    As far as the valuation is concerned, the total market cap of all the Dow companies is nearly 27 times more than Sensex companies. Given the size of the US economy as compared to India, this does not come as a surprise. Moreover, most of the Dow companies have their reach spanning across the length and breadth of the globe. This helps companies in diversifying geographical risk and reducing dependence on a single market. As a consequence, such companies enjoy better valuations, which in turn leads into higher market capitalisation.

    Industry wise break-up
    Market cap (US $ bn) 132.3
    Energy 19.1%
    IT 15.9%
    Petrochemicals 11.5%
    Finance 11.5%
    FMCG 9.1%
    Auto 7.0%
    Telecom 5.8%
    Health Care 5.7%
    Metals 4.5%
    Cement 3.4%
    Power 2.9%
    Capital goods 2.4%
    Media 1.0%
    Market cap (US $ bn) 3,633.6
    IT 17.2%
    Finance 17.0%
    Health Care 13.7%
    Diversified 12.4%
    Retail 9.3%
    FMCG 9.1%
    Energy 8.7%
    Telecom 5.5%
    Aerospace 2.6%
    Media 1.3%
    Chemicals 1.2%
    Metals 0.7%
    Capital goods 0.7%
    Auto 0.6%

    The above table shows the industry wise contribution of different industries towards the total market capitalisation of both the benchmark indices. After looking at the break-up, one feels that despite being at the opposite ends of spectrum in terms of development parameters, there is a fair amount of similarity in the weightages being commanded by different industries.

    Services intensive industries such as IT, finance, retail etc., account for a sizeable chunk of the total market cap of Dow. Here we feel compelled to add that just as there occurs a structural change in an economy, components of benchmark indices such as Dow and Sensex also keep on changing in order to reflect the current state of an economy. Thus while manufacturing companies used to dominate the Dow during the 70's and 80's, services sector now rules the roost. This is because, the era of dominance of US manufacturing had been usurped back then by countries such as Japan and Germany, and now China. Little wonder that companies such as GM, which is still the world's largest automaker, has such a small weightage as it is increasingly under pressure from Japanese and German automakers.

    On the other hand, decline in manufacturing has also helped the country to take a step further and move onto something more productive. The IT revolution, which is being touted the third big revolution after the agri and the industrial revolution is believed to have its genesis in the US and has aided the US economy to keep on growing at a robust pace. It therefore comes as no surprise that companies from the IT sector command the highest market cap on the Dow. As far as India is concerned, from being an agrarian economy we seemed to have moved on directly to services, largely bypassing the manufacturing sector. The industrial revolution that the US went through and the one, which China is currently experiencing, do not seem to form a part of the Indian economic history.

    This could be attributed to insularity of the Indian economy to outside capital until the 90s. However, while the Indian markets did open to the three virtues known as LPG (Liberalisation, Privatisation, Globalization), infrastructure, which potentially acts as a magnet to foreign capital and one which is key to a thriving manufacturing sector is still behind other developing nations and this has stifled the Indian manufacturing growth.

    On the other hand, presence of a large english speaking, qualified and low cost talent pool has transformed the country into the back office of the world and has led to a huge growth in the IT space. As a consequence, companies such as Wipro, Infosys and Satyam have mastered the art of servicing foreign clients and today command valuations that are significantly higher than companies from other industries. Hence, the IT sector contributes a sizeable 16% to the overall market cap of the BSE.

    While other industries across both the indices are more or less similar, there is one striking difference between the business profiles or models of companies in the two countries. While US companies are mostly into businesses that are high up the value chain and the one which require huge investments in R&D, their Indian counterparts are at the lower end of the value chain. This is clearly brought out in cases of pharma and IT companies.

    While US pharma companies rely on extensive research and come out with medicines built from scratch, their Indian counterparts manufacture bulk drugs and resort to reverse engineering. Similar disparity exists among Indian IT and US IT companies. It should be remembered that here we are not trying to demean the Indian companies and dub them as uncompetitive. Rather, a positive can be drawn from such a comparison.

    We believe that if the Indian economy has to grow from a developing to a developed economy then some of these Indian companies would have to grow to the same level as the US companies are now. We can be a part of this wonderful growth story if we are able to spot these companies and stay invested in them for the long term. Also, as India becomes more developed, some industries would have to play more vital role than others and some of them would altogether diminish, paving way for new sunrise industries. While a lot of them would be similar to industries constituting the Dow, a few might be different as well. The important thing is to identify the trend and stay ahead of the curve.



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