• MARCH 9, 2002

Stock Market: Sense in sensex?

As has been seen historically, market indices tend to exhibit increased volatility in the run upto the budget, as investors speculate on the possible sops to be doled out to industry. Activity tends to continue for a few days post budget, as analysts & others scrutinise the finance bill to determine the budget impact on various sectors. The high linkage to the budget -- and as an extension to the economy -- seems to last only for those few days.

Sensex: Is in sync?

Though both growth in GDP and Sensex movements have shown a positive association over the past twenty years ending FY00, the degree of association has been varying quite widely. To that extent it could be difficult to attribute changes in the index to growth in the economy. A point to note is that the Sensex composition has replaced 31 scrips in the last fifteen years. This is likely to have facilitated a sharper rise of the index. Also, the sharp jump on the bourses in the last year of study (FY00) does tend to increase growth rates.

Dissecting the economy into its constituents; agriculture, industry and services has not been of much help, as the linkage between the Sensex and sectoral performance does not seem to strengthen. The data does seem to show greater linkage towards the services sector, as compared to industry. Agriculture also has not shown much association to changes in the Sensex. One could argue that the sector is not directly represented. However, few companies are dependent to some extent on farm incomes and respond to changes in performance of the agriculture sector, which gets reflected on the bourses.

Having said that, the linkage between the Sensex -- a proxy for the market -- and the economy seems to have weakened over the past six years. In FY96, the Sensex fell by 17.2% while the real growth in GDP, industry and services was 7.3%, 12.3% and 7.9% respectively. However, agriculture that year slipped marginally. In FY99, markets once again fell while economic growth came in at 6.5% with services booming in double digits and agriciulture registering healthy growth. Divergence in the stock market could be due to the Indian Government carrying out nuclear tests that fiscal, which was followed by 'Kargil'. Also, over FY98 & FY99, political stability was very fragile. But this could also indicate that markets overestimated the fallout from these events on the economy at large. Contrary movements again in FY01 could be attributed to the sharp slowdown in services and markets correcting the excesses built up over FY00.

Going forward, there could be disparity in performance of the economy and the Sensex. Services sector, not including Government services, is the largest constituent of the economy but has only 27% representation on the Sensex. This could also explain sluggishness in the markets, as industry recorded a sharp slump in the current fiscal and has 73% representation on the benchmark index.

    Sensex: Churning portfolios

Arvind Mills19961998
Tata Chem19962000
To better represent the economy, if that is the objective, an index should be constructed with similar sector weightages in mind. This should be the responsibility of the stock exchange. Currently, the selection process seems to be guided more by scrips that are in the market's fancy. The National Stock Exchange (NSE) removed Dr. Reddy's in 1997 and reintroduced the stock in 1999. The time has come for exchanges to look at businesses/companies that are likely to be around in the next decade.

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