For most common Indian, the BSE Sensex is equivalent to the Indian stock market, and for experts it is the nerve of Dalal Street. But, since the day I started understanding stock market and its functions, the biggest question that kept haunting me was, when we have a huge pool of listed (public limited) companies in the country (as many as 81,926 as on December 31, 2010), how correct are we by following a benchmark indicator that consists of just 30 companies selected on the basis of a single parameter - market capitalisation?
As a finance professional, I often get to see many presentations which compare BSE Sensex with NYSE Composite to prove a point. But I just want to ask a simple question to those sophisticated presenters; the comparison that they showcase, is it between two equals? Certainly not! While the Sensex presents an ultra-narrow view point by indicating stock movement of 30 companies of an exchange that houses the world’s largest number of listed companies, NYSE Composite, on the other hand, presents a broad and global view by showing market movements of 1867 stock (1530 US companies and 337 non-US companies).
Moreover, while the top global indices, be it NYSE Composite or Nasdaq Composite, provide comprehensive sector coverage by including stocks from all the 10 industries defined by the Industry Classification Benchmark, the Sensex does not even pay a heed to the same. On the contrary, the Indian benchmark index is heavily skewed towards just 3 sectors - Oil & Gas, Financial Services and Information Technology - as combined together they control over 50% of the total weight in the index at any point of time – whereas some other key sectors like aviation and gems and jewellery are either completely ignored or get a paltry weight of 1%-2% like the healthcare sector (Cipla is the only healthcare company in the Sensex with a weight of 1.1% as on April 21, 2011).
But possibly, what makes Sensex the worst possible indicator from India’s point of view is the fact that the index does not even represent 30 stocks in true sense. Thanks to sole selection criteria of market capitalisation, it’s just a representative of the top 10 stocks which have a combined weight of 67.25% (as on April 21, 2011) in the index, whereas, the top 10 in NYSE Composite holds a total weight of less than 15% at any point of time. What’s laughable in the Indian context is the fact that any strong movement in the top 2 index constituents, Reliance Industries (11.78% weight) and Infosys (9.43% weight), alone is good enough to rig the Sensex much more than what the bottom 5 (combined weight of just 3.69%) can do together.
For an average common man, who does not understand what the Sensex at 20,000 actually means, the index is also an indicator of the country’s economic growth. But as the past records suggest (in 2008, the economy grew at 9% when the Sensex dropped over 52%; on the other hand, Sensex gained 81% in 2009 when the economy only managed a 7.4% GDP growth) the Sensex is on a completely different tangent as compared to the economy. And the reason, for sure, is the narrow base that it represents. So it’s high time that we actually should either abandon looking at the Sensex as a benchmark of any sort and move one to some other index like BSE 500 or perhaps BSE 1500, or change the existing selection criteria of Sensex to present a comprehensive and wider indicator that also shows the real picture of the economy. BSE has already lost the stock market war to NSE in 2009. It might also lose the index war in 2011...
As a finance professional, I often get to see many presentations which compare BSE Sensex with NYSE Composite to prove a point. But I just want to ask a simple question to those sophisticated presenters; the comparison that they showcase, is it between two equals? Certainly not! While the Sensex presents an ultra-narrow view point by indicating stock movement of 30 companies of an exchange that houses the world’s largest number of listed companies, NYSE Composite, on the other hand, presents a broad and global view by showing market movements of 1867 stock (1530 US companies and 337 non-US companies).
Moreover, while the top global indices, be it NYSE Composite or Nasdaq Composite, provide comprehensive sector coverage by including stocks from all the 10 industries defined by the Industry Classification Benchmark, the Sensex does not even pay a heed to the same. On the contrary, the Indian benchmark index is heavily skewed towards just 3 sectors - Oil & Gas, Financial Services and Information Technology - as combined together they control over 50% of the total weight in the index at any point of time – whereas some other key sectors like aviation and gems and jewellery are either completely ignored or get a paltry weight of 1%-2% like the healthcare sector (Cipla is the only healthcare company in the Sensex with a weight of 1.1% as on April 21, 2011).
But possibly, what makes Sensex the worst possible indicator from India’s point of view is the fact that the index does not even represent 30 stocks in true sense. Thanks to sole selection criteria of market capitalisation, it’s just a representative of the top 10 stocks which have a combined weight of 67.25% (as on April 21, 2011) in the index, whereas, the top 10 in NYSE Composite holds a total weight of less than 15% at any point of time. What’s laughable in the Indian context is the fact that any strong movement in the top 2 index constituents, Reliance Industries (11.78% weight) and Infosys (9.43% weight), alone is good enough to rig the Sensex much more than what the bottom 5 (combined weight of just 3.69%) can do together.
For an average common man, who does not understand what the Sensex at 20,000 actually means, the index is also an indicator of the country’s economic growth. But as the past records suggest (in 2008, the economy grew at 9% when the Sensex dropped over 52%; on the other hand, Sensex gained 81% in 2009 when the economy only managed a 7.4% GDP growth) the Sensex is on a completely different tangent as compared to the economy. And the reason, for sure, is the narrow base that it represents. So it’s high time that we actually should either abandon looking at the Sensex as a benchmark of any sort and move one to some other index like BSE 500 or perhaps BSE 1500, or change the existing selection criteria of Sensex to present a comprehensive and wider indicator that also shows the real picture of the economy. BSE has already lost the stock market war to NSE in 2009. It might also lose the index war in 2011...
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