Every evening, television anchors and newspaper headlines report whether the market closed higher or lower, often referencing numbers that most casual observers understand only vaguely. Behind these daily updates lie carefully constructed benchmarks, commonly known as NSE Indices when tracked on one exchange and BSE Indices when tracked on the other, that serve as barometers for the broader health of Indian equities. Understanding what these numbers actually represent, and why they move the way they do, offers valuable insight into how the country’s economy is perceived by investors, both domestic and international.
What These Numbers Actually Measure
At their most basic level these benchmark figures represent a weighted average of the prices of a basket of stocks, which have been chosen to reflect a certain segment of the market. The most commonly watched benchmarks broadly represent the value of the largest and most popular stocks in the market, and give a sense of how well known blue-chip companies are doing. A rise in these figures represents optimism in wider corporate earnings, economic growth and the overall health of the economy, while a drop signifies worries in markets about inflation, interest rates and the performance of individual companies whose shares make up the benchmarks.
It is important to note that the numbers represent not a simple average but a weighted one, usually based on the market capitalisation of the companies covered by a given benchmark. That means that changes in value of the stocks of bigger companies (which have a higher percentage of total listed shares) will have a bigger impact on the number in comparison to smaller firms. Therefore, even if hundreds of stocks saw their value increase on a particular day, the benchmarks might not rise owing to only a few major companies posting losses (or weaker gains in comparison to peers). A similar argument applies to falls in the numbers, which can often leave investors in stocks feeling surprised that their portfolio underperformed when compared to the overall change in a given benchmark figure.
While the headline figures are important most markets have a large range of benchmarks representing the performance of different segments of the market and industry verticals (banking, information technology, pharmaceuticals and metals amongst others). These narrower focused figures allow investors and analysts to get a detailed view into the performance of different sectors, which helps in making macroeconomic assessments and investments in individual companies.
Why These Benchmarks Figures Are Useful Beyond Headlines
For individual investors, the benchmarks serve as a useful reference guide to judge their own personal portfolio, fund or stock performance. If an investor has seen the value of their equity holdings grow by around 20 per cent over the course of a year while the overall market grew by 35 per cent this suggests that either their fund managers have been consistently underperforming or the approach they took to choosing their investments is not yielding the returns they expected.
Fund managers on the other hand often operate in direct (or implied) competition to each other and therefore these figures help in identifying whether active managers are earning a premium to passive approaches such as index funds. In a competitive environment where products which attempt to offer exposure to a given set of shares (as represented in a benchmark) with minimal tracking error are popular with many Indian investors, the figures also serve to give an indication of whether active managers are living up to their billing.
The figures also serve as a useful barometer for economic and market health. Trends in these numbers can offer hints to wider economic health of the country. If a figure has consistently risen over a long period, this can be seen as a proxy to judge increasing business confidence in the economy. Similarly a prolonged fall or stagnation in these numbers will raise questions about the overall state of the economy.
How To Think About These Numbers Beyond Headlines
For new investors it can be easy to get caught up in the day to day swings of the numbers. As markets tend to swing between optimism and pessimism on a regular basis, a day of sharp falls in a figure can trigger investor anxiety about the overall economy. However in most cases the figures are impacted by headwinds (such as currency, commodity and share valuation fluctuations) which rarely speak to long term economic or market health.
Instead it is useful to look at long term trends in the figures as opposed to day to day changes, and try to identify what forces are driving changes in numbers. Is the market growing because of broad-based gains across different sectors and stocks, or is the increase led by a small number of companies which dominate the overall value of a particular benchmark (such as the Nifty 50 for the CNX Nifty)? Similar arguments can be made for falls in the numbers, and investors would be well advised to analyse the forces driving these changes as opposed to fixating on a figure. Comparisons between different sets of numbers can also be useful in identifying trends, as while a broad-based set of benchmarks such as the CNX Nifty might be rising, other narrower ones (representing smaller companies) might be significantly lagging. Investors who dedicate time to look past the headline number and assess the underlying factors and trends tend to find themselves in a better position to make decisions than those who simply focus on the daily news cycle.
Gaining Perspective As An Individual Investor
Understanding the fundamentals behind the numbers gives informed investors the ability to identify context for the changes, which allows them to make better-informed decisions. Investors who have a basic grasp of the figures can avoid panicking at news of a fall in a number, and instead focus on whether there are legitimate macroeconomic concerns or if this is simply a case of day-to-day market volatility. Being able to distinguish between the two is one of the most important skills that an investor can learn, and an awareness of the forces behind these figures will help in that process. As India’s economic growth and market evolution continue to take place, these figures will continue to act as a helpful but imperfect barometer to judge market sentiment. Using informed analysis rather than knee-jerk reactions will help investors get the most out of them and allow them to take advantage of opportunities that arise from confusion with regard to the figures on the part of peer investors.
