India or US? Innovation, Not Market Remedies, Will Decide Equity Returns

Foreign investors have turned noticeably cautious on Indian equities, and a section of Dalal Street is already asking for policy fixes to lift prices. A recent BusinessLine analysis suggests the more useful question is different: are Indian companies investing in the innovation that drives long-term growth, or are they simply collecting strong profits?

The numbers on the headline level flatter the US market. Over three years, the S&P 500 far outpaced India's Nifty 500 on a capitalisation-weighted basis. Equal-weight comparisons tell a more balanced story, because they strip out the effect of a handful of mega-cap winners. On that basis, the gap narrows sharply. Over five years, the S&P 500 equal-weight index returned about 12 per cent a year in rupee terms, against roughly 11 per cent for the Nifty 500 equal-weight index. Over ten years, the figures were around 14 and 12 per cent.

American stocks are not immune to pain. About 58 per cent of S&P 500 constituents were trading at least 20 per cent below their all-time highs, compared with about 78 per cent of Nifty 500 stocks. Brands such as Nike, Netflix, Intel and Ford have fallen more than half from their peaks, and Adobe is down about 64 per cent from its record, as investors question whether these businesses can keep pace with AI-led change. The lesson is that even in the world's most dynamic market, companies that lose their innovative edge get punished.

India's corporate sector has a strong hand to play. The analysis notes that Indian companies have enjoyed some of the best profitability among major markets, which gives them the financial muscle to fund research, new products and technology bets. The question is whether that cash is being put to work on frontier technology or mostly on expanding existing businesses.

Thematic funds offer a clue. Many Indian innovation-themed mutual funds hold large positions in banks, consumer internet firms, ports, energy and retail, names that are successful but not obviously frontier-technology plays. Innovation ETFs in the US, by contrast, lean toward companies working in autonomous driving, AI-driven healthcare and gene editing. Fund mandates differ, and better distribution or consumer franchises can be forms of innovation too. Still, the contrast shows how limited the pool of advanced-technology listings is for domestic investors.

The takeaway for readers is practical. Rather than waiting for policy relief to lift Indian stocks, investors may do better to watch which companies are reinvesting their profits into genuinely new capabilities. Markets reward firms that adapt, and India's next leg of equity returns may depend less on market tweaks than on whether its listed giants show the ambition to lead.

Read the full analysis at BusinessLine.

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