Why Sensex?

EDITORIAL

Retail investors must not be trapped by media euphoria over indices
Article Date: 
Jan 17 2013, 1142

If one were to compare the euphoria in newsrooms of Indian business dailies and euphoria on Dalal Street when Nifty crossed the 6,000 mark, journalists would win hands down. In the past three days, headlines in business newspapers, including this daily, have been dominated by how Nifty has crossed the 6,000-mark and what led to this milestone. This is not the first time that newsrooms have beaten the Street on sentiment. In December 2011, when Sensex touched 15,000, every second headline analysed why and how indices would continue to suffer as the year progressed. It was gloom and doom then. Thankfully, that never happened. Today analysts and newspaper editors are once again busy forecasting what lies ahead for the indices. But how relevant are these forecasts to retail investors? The answer is not much, rather none at all. At the end of day, what matters is the value of the particular stock held by an investor in his portfolio. That appreciation has to come over a period of time, and the pace of wealth generation will not increase just because the Sensex may have crossed a certain milestone or slipped a few hundred points below. Fact is that both the benchmarks, Nifty and Sensex, barely constitute 50 and 30 stocks, respectively, out of 5,000 companies listed on Indian exchanges. And that’s good enough reason why they don’t reflect the wealth creation or destruction for a majority of Indian investors. So, this obsession among media and market analysts alike about the indices is best worth ignoring. In the past two years when the indices were on a weight-loss drive, and were slipping down every month, stocks such as HUL, ITC, Asian Paints and Nestle, among others, were able to log gains month after month, creating wealth for their shareholders, for whom Sensex above or below 15,000 was irrelevant. That situation has reversed in the past three months, with the indices gaining weight, while the very stocks quoted above, either languishing or shedding weight. Small wonder then, for owners of these stocks, the Sensex breaching 20,000-mark holds little meaning. Our advise to investors is necessarily one of caution against media euphoria. Another reason why investors must be wary of reacting to indices reaching certain milestone is that buy and sell decisions on specific stocks are no longer determined by retail sentiments, but external factors. Unlike in the past, when buying in underlying stocks made indices move up and down, there are a number foreign institutional investors who now trade only in Indian indices. For example, Nifty futures is among the most liquid instruments available for trading worldwide, attracting a certain set of traders to Indian bourses. While it is good that they bring liquidity, they also bring volatility to the market, clearly negating the importance that a retail investor should be giving to an index while deciding on whether to invest in a company or not. Several funds are prone to selling indices to hedge their positions in specific stocks they may be holding in their portfolios. Yet, that does not make them bearish on individual companies. There are others who may sell indices by selling a basket of stocks to book quick gains. It is a well-known fact that some large investors attempt index management on the day of expiry of contracts in the futures and options segment. This hardly means that the indices are not relevant at all; they are relevant to traders. Yet, for investors for whom the fundamentals of the economy and the company matter, the best option is to ignore these breakouts and breakdowns.

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