Nifty, Sensex a long way from truly representing the economy

Nifty, the benchmark index of the National Stock Exchange (NSE), replaced Grasim with Kotak Mahindra Bank last week. With this, the percent weight of the banking and financial services (including housing finance) sector in the index increased from 22.97 to 23.86. In 2005, it was 19.78.

The sector has the highest weight in Nifty as well as Sensex, the benchmark index of the Bombay Stock Exchange, followed by oil & gas. However, going by the weights of various sectors in these indices, they no more look like barometers of the economy, as various heavyweights in the economy are almost not represented.

For instance, in the country’s gross domestic product, agriculture contributes 20.14 per cent and the trade sector 23.57 per cent. But, both are almost absent from these benchmark indices. Vikash Khemani, co-head, institutions sales, Edelweiss Capital, said: “These fairly represent the economy. However, one should look at indices as representing the market. Within the listed companies, they should be fairly representative, and that is there.”

Said Chetan Majithia, head of equities, Crisil, “Our study has shown that among BRIC (Brazil, Russia, India and China) nations, Indian markets are more diversified, and that is reflected in the indices.”
 

MEASURING WEIGHTS
	Weight in Nifty			Weight in Sensex
	2005	2009	2010	2005	2009	2010
Banks & Finance	19.79	18.22	23.86	22.21	18.82	22.31
Oil & Gas	16.23	21.63	17.22	17.50	21.29	18.25
IT	15.99	10.72	12.10	15.52	12.08	13.84
Capital Goods	4.39	8.74	9.94	4.48	8.75	9.98
Metals & Steel	8.18	3.86	8.56	8.26	3.50	7.22
FMCG	8.98	11.81	7.72	9.84	13.67	9.18
Automobile	6.84	3.80	5.20	5.05	4.39	6.18
Power Generation	2.33	5.71	4.32	2.65	5.21	4.24
Telecom-Service	4.93	7.85	3.75	4.57	7.43	3.62
Construction & Realty	-

0.67 2.41

-

1.28 2.11 Pharmaceuticals5.162.692.284.701.200.96 Gas Distribution1.531.501.42

-

0.000.00 Cement4.022.801.204.572.372.12 Others1.620.000.000.640.000.00

For example, the Russian market’s composite index, MICEX, gives 50.01 per cent weight to oil and gas and 19.56 per cent to the basic raw material sector. Over two-thirds weight is of commodity-related sectors.

Brazil’s Bovespa index is heavy on basic raw materials (33.93) and oil and gas (15.47). China’s Shanghai Stock Exchange’s index gives 32.35 per cent weight to the financial sector but oil and gas, basic raw materials and industrials account for nearly 48 per cent. Compared with these, Nifty and Sensex are widely distributed and diversified.

Chetan says, “If you feel crude oil prices are going up, you go long on Russia, and long on Brazil if commodity prices are moving up. If you want to diversify risk, India is a better bet among BRIC nations.”

In terms of weights globally, most developed markets’ indices differ. Nikkei 225 gives 28.08 weight to industrials, 20.16 per cent to consumer goods and only 6.15 per cent to the financial sector. FTSE gives the highest (21 per cent) weight to financials, while the Hang Seng is overweight on the financial sector (58.15 per).