Sensex is an index that tracks the top 30 companies of India. What does Sensex mean? What is an index? Why is it even needed?
India ended 2018 as the best performing Asian market and the best performing major global market in the world after Brazil.
The Sensex is up nearly 6% in the year 2018. Domestic stocks have fared better than most of the global stock markets.
Let’s look into Sensex and its performance over the years.
In this article
- Sensex in 2018
- Sensex and 2008’s crash
- Sensex history
- What is Sensex?
- How is Sensex calculated?
- What is an Index?
- Why countries need Indices?
Sensex in 2018
Towards the end of 2018, Sensex closed on a positive note despite witnessing volatile phases of trade during the past 1-year period.
Sensex started with 33,182 points at the beginning of the year 2018 and ended with 36,068 points.
That is, Sensex has logged nearly 6% gains between January 2018 and December 2019.
But the gains look mediocre when compared to the rise the benchmark indices clocked in the year 2017.
The BSE Sensex ended 2017 with a gain of around 30%.
For the first time, Sensex passed the score of 38,000 in intra-day trading.
On 29th August 2018 Sensex reach an all-time high of 38,989.65.
Indian domestic stocks have fared better than most global equities.
Comparing with big global markets, while the Dow Jones index is down 7.5% in the year 2018, Nasdaq has lost 5.4% during the same period.
The negative sentiment is widespread in Asia too, where the Nikkei 225 index has lost 11.4% in 2018. Hang Seng, another key Asian market has lost 14.5% in the same period.
But we have seen high volatility in the last 1 year in the Indian market which led to the sharp ups and downs of Sensex in 2018.
Sensex Fall 2018
Here are 5 important events of the year 2018 which high affected the Sensex in the past 1 year:
1. Tumbling Rupee
A falling rupee weighed heavy on investor’s sentiment in the Indian stock market.
The Indian currency plunged to its fresh record low of ₹74 against the dollar early October, which led to the sharp decline of Sensex in October 2018.
2. Rise and fall in the price of crude oil
86% of Indian crude oil need is imported. This shows how heavily Indian economy relies on the price of crude oil.
In 2018, Brent crude was trading over $86 per barrel in October but again reaches to $54 per barrel in December.
Sensex reacts strongly to the Brent crude movement in 2018.
3. Infrastructure Leasing & Financial Services (IL&FS) fiasco
Some organizations carry systemic importance for the entire financial industry in India.
IL&FS is one such.
The financial mess at IL&FS in 2018 is a testimony to inefficient cash-flow management and excessive leverage by NBFCs.
The debt-to-equity ratio of the company stands at approximately 20 and the outstanding debt of the company stands at ₹91,000 crore.
The company operates through 159 direct and indirect subsidiaries, and half a dozen associated companies. This was another reason that the problem at IL&FS got out of hand.
After this incident, the Central bank of India started to tighten norms for NBFCs given that many are becoming systemically important and have a higher dependence on short-term sources like commercial papers and mutual funds.
In the immediate future, it will be relatively difficult for NBFCs to raise money at the right kind of pricing. This will trouble the Sensex further.
4. India’s Current Account Deficit (CAD)
Sensex came under pressure in 2018 after the widening CAD data returned to haunt the Dalal Street after 5 years.
CAD is a term used for a country’s trade situation where the value of the goods and services it imports exceeds the value of the goods and services it exports.
The weakening rupee against the US dollar and high crude oil prices in the international market led to a rise in the current account deficit in the first and second quarter of 2018.
5. Volatility in Global Markets
Economic uncertainty in the US markets and trade tensions of the US with other countries, especially with China, have been a source of volatility for global markets and there highly impact the performance of Sensex.
But even after all these factors, the Indian stock market ended in 2018 as the best-performing Asian market and the best-performing major global market after Brazil.
The strong fundamentals of the Indian economy, falling commodity and crude prices have insulated the Indian stock market from the global stock market slowdown.
Sensex and 2008’s crash
The year 2008 had been a devastating year for the Indian stock markets. After scaling the 21,000 peaks in January 2008, the markets were at 8,000 by December.
During the global financial crisis of 2007-2008, the stock markets in India fell a number of times in 2007 as well as 2008.
On 21st Jan 2008, Sensex fell by 1408 points to 17,605 leading to one of the largest erosions of investor wealth in Indian stock market.
Referred to as Black Monday by the media, the fall was blamed by analysts at HSBC mutual fund and JP Morgan on numerous reasons, such as:
- Change in the global market investment climate,
- Fear of the US economy going into recession,
- FIIs and foreign hedge funds selling, to reallocate their funds from risky emerging markets to stable developed markets,
- A cut in the US interest rates,
- Commodity market volatility,
- Combination of global and local factors,
- Large build-ups in derivative positions leading to margin calls in the market.
Sensex crashed by around 60% in the year 2008 and then it jumped by 157% in the next one and half year.
The Sensex is regarded as the pulse of the domestic stock markets in India since it was officially published on 1 January 1986.
The base value of the Sensex was taken as 100 on 1 April 1979 and it is base financial year as 1978–79.
Sensex experienced enormous growth in the first decade of the 21st century, rising from 3,377 points in 2002 to one of 20,300 in 2007.
This reflects India’s Gross Domestic Product (GDP) growth since the turn of the century, which ranks as one of the fastest in the world economy.
According to International Monetary Fund (IMF) estimates, India’s GDP grew rapidly between 2002 and 2007, and then stunted a bit in 2008, in stride with the global economic crisis of that year, but was back on a strong growth rate after 2010.
Major crashes and correction in Sensex
1. Crash of 1992
On 28 April 1992, Sensex experienced a fall of 12.7%. This was its largest fall in history (in terms of percentage) due to the Harshad Mehta scam.
Harshad Mehta was a stockbroker who is mainly remembered for manipulating the stock market.
He had over 27 criminal charges against him, but the one involving stock manipulation is what triggered the crash of Sensex.
2. Crash of 1996
Sensex plunged by 40% over a 4-year period. It jumped by 115% post that in next 1 year.
3. Crash of 2000
Sensex crashes due to bubble burst in Indian IT Sector. It crashed by 56% in over 1 year and then jumped 138% in next 2 ½ years.
4. Crash of 2008
Sensex crashed by around 60% in 1 year, it jumped by 157% in the next 1 ½ years post that.
5. Crash of 2010
Sensex corrected by 28% in 1 year and then jumped by 96% in next 3 years.
6. Correction of 2015
The crash of Sensex in 2015 was also a huge blow to the Indian economy as it came at a time when the country was registering significant growth.
On 24th August 2015, Sensex crashed by 1,624 points and finally closed at 25,741 points.
The reason given for the crash was a ripple effect due to fear of a slowdown in China, as the Yuan had been devalued which leads to a fall in the currency rates of other countries and the rapid selling of equities in China and India.
Sensex corrected by 23% in 1 year and got very good returns after that.
What is Sensex?
Mr. Deepak Mohoni, a stock market analyst, coined the term Sensex. It is an amalgamation of the words Sensitive and Index.
The Sensex, also-called the BSE 30 or BSE Sensex, is a free float market weighted stock market index of 30 well established and financially sound companies of India listed on Bombay Stock Exchange (BSE).
These 30 companies which are some of the largest and most actively traded stocks are representative of various industries of the Indian economy.
Sensex constitutes of 31 stocks (with Tata Motors has two stocks in the list):
|1||Asian Paints Ltd.|
|2||Axis Bank Ltd.|
|3||Bajaj Auto Ltd.|
|4||Bajaj Finance Ltd.|
|5||Bharti Airtel Ltd.|
|6||Coal India Ltd.|
|7||HCL Technologies Ltd.|
|8||HDFC Bank Ltd.|
|9||Hero MotoCorp Ltd.|
|10||Hindustan Unilever Ltd.|
|11||Housing Development Finance Corporation Ltd.|
|12||ICICI Bank Ltd.|
|13||IndusInd Bank Ltd.|
|16||Kotak Mahindra Bank Ltd.|
|17||Larsen & Toubro Ltd.|
|18||Mahindra & Mahindra Ltd.|
|19||Maruti Suzuki India Ltd.|
|21||Oil & Natural Gas Corporation Ltd.|
|22||Power Grid Corporation Of India Ltd.|
|23||Reliance Industries Ltd.|
|24||State Bank Of India|
|25||Sun Pharmaceutical Industries Ltd.|
|26||Tata Consultancy Services Ltd.|
|27||Tata Motors – DVR Ordinary|
|28||Tata Motors Ltd.|
|29||Tata Steel Ltd.|
|31||Yes Bank Ltd.|
How is Sensex calculated?
The calculation of Sensex points is done by a Free-Float method that came into existence from September 1, 2003. The levels/points of Sensex are a direct indication of the performance of 30 stocks in the Indian market.
The free-float method takes into account the proportion of the stocks that can be readily traded in the market. This does not include the ones held by shareholders, promoters or other locked-in shares not available in the market.
First, the market capitalization of the company is taken into account. This is done by multiplying all the shares issued by the company with the market price of its stock.
Then Sensex determines a Free-float factor that is a multiple of the market capitalization of the company which helps in determining the free-float market capitalization based on the details submitted by the company.
And then, ratio and proportion are used based on the base index of 100 points. This helps to determine the Sensex points.
What is an Index?
An index is a measurement of a section of the stock market for any country.
Among all the stocks listed on the exchange, some similar stocks are selected and grouped together to form an index.
This classification may be on the basis of the sector the companies belong to, the company size, market capitalization of the company or some other basis.
The values of the grouped stocks are used to calculate the value of the index. Any change in the price of the shares leads to a change in the index value.
An index is thus indicative of the changes in the market and used by investors and financial managers to describe the market of any company, and to compare the return on specific investments.
Two of the primary criteria of an index are that it is investable and transparent in nature.
Why countries need Indices?
An index is an important part of the country’s stock market and therefore of investments.
Here’s why countries around the worlds need stock indices for:
1. Help in Sorting
In the stock market, there are thousands of companies listed. It is very difficult for an investor to differentiate between all of those stocks and pick one or two to buy.
And then sort them out to invest, is a classic case of a pin in a stack of hay.
This is where the index come into the picture. Companies are classified into indices based on key characteristics like company size, sector or industry they belong to, and so on.
2. Representative of market
Index act as a representative of the entire market or a certain segment/sector of the market in the country.
The Sensex and the Nifty are considered the benchmark indices in India. They are considered to represent the overall Indian market performance and help investors to pick the right stock for them.
Similarly, an index formed of pharmaceutical stocks is supposed to represent all stocks of companies from the healthcare industry.
3. Comparison of performance
An index makes it easy for an investor (both domestic and foreign) to compare the performance of the set of companies or market as a whole in any company.
In the Indian stock market, Sensex is often used as a benchmark.
So, to find if a stock has outperformed the market, you simply compare the price trends of the index and the stock and buy the stock of that company.
Also, an index can also be used to compare a set of stocks against a benchmark or another index.
Let’s say on a given day, the benchmark index like Sensex may jump 200 points, but this rally may not extend to a certain segment of stocks like pharmaceutical stocks.
Then, the fall in the value of index representing pharmaceutical stocks could be used for comparison rather than each individual stock.
This also helps investors to identify market trends easily.
4. Reflection of sentiment
Investor sentiment is a very important aspect of stock market movements for any country. This is because, if the sentiment is positive, there will be demand for a stock and economy of country booms.
5. Passive investment
Many investors prefer to invest in a portfolio of stocks that closely resembles an index. This process of picking stocks is called passive investment.
Passive Investment helps investors cut down the cost of research and stock selection as they rely on the index for the selection of stocks. As a result, investor’s portfolio returns will match that of the index.
If Sensex gave 10% returns in one year, an investor’s portfolio that resembles the Sensex is also likely to give the same amount of returns.
There are a lot of factors you should take into consideration before selecting a stock of a company that matches your investment goal.
Disclaimer: the views expressed here are of the author and do not reflect those of Groww.