India has been one of the world’s top-performing stock markets over the past 20+ years, outpacing China and the broader emerging markets (EM) equity category, as well as developed markets (DMs) like the US and global equities overall (Figure 1). However, India has also been one of the world’s more volatile equity markets during that time. While its risk-adjusted return has been similar to that of many DMs, India equity has achieved that result by generating higher absolute returns with correspondingly higher realized volatility (as measured by standard deviation). 

Figure 1

Encouragingly, this pronounced risk/return tradeoff has changed for the better in more recent years. Indeed, the historically elevated volatility of India’s stock market has come down significantly since the 2008 global financial crisis (GFC) — much more so, in fact, than in many other world equity markets over the same period (Figure 2). We attribute this rapid decline in realized volatility largely to a shift toward more domestically driven asset flows (Figure 3): Today, unlike the pre-GFC era, Indian investors themselves are the primary owners of India equity. As a result, the market, now less susceptible to foreign investor sentiment, has become more stable and meaningfully less volatile.

Figure 2

Figure 3

Bottom line for investors in India equity

The marked improvement in the risk/return tradeoff associated with India equity is a welcome development for return-seeking, risk-conscious investors who have (or are considering) an allocation to this key emerging market.