BSE Sensex - safest in a volatile world

Sensex safest in a volatile world

If you thought the BSE index was a scary rollercoaster, think again. Over the last 10 years, its proved a global frontrunner, delivering reasonable returns without excessive volatility.

The Sensex has vaulted above 6,000 again, and there are smiles all around. But is that only until black Monday or black Tuesday or black whichever day of the week comes along some time soon? Not very likely, if history is any indicator. Despite the seemingly heart-stopping ups and downs of the Indian stock market, its actually among the least volatile.

It isnt the easiest thing to track stock exchange performance. While it is easy to track the performance of a particular stock over the long term, indices such as the Sensex keep changing the stocks they consist of and the weightage given to different stocks. However, they still remain the best indicators of market trends.

We decided to track the performance of the Sensex over the last decade vis-a-vis indices from other major stock exchanges the New York Stock Exchange, London Stock Exchange , Frankfurt Exchange, Hong Kong and Tokyo Stock Exchange. The Sensex was measured against the NYSEs Dow Jones Industrial Average, LSEs FTSE 100, Frankfurts Dax, Hong Kongs Hang Seng and Tokyos Nikkei to see how the Indian stock market has performed relative to others. Since measuring changes from one arbitrary point in time to another could introduce distortions, we used a 12-month moving average instead of the value of the indices on any specific date.

If all the indices were set to 100 in the moving average for April 1994 (that is the average for October 1993 to September 1994), the Sensex would have been at 141.2 in March 2004, a gain of 41.2%. While the Dow and DAX did better than this over the decade, the FTSE 100, the Hang Seng and the Nikkei recorded lower increases. The Dow would have been at almost double the Sensex clocking 271.7 in March 2004, far ahead of the Dax at 181.4. The Nikkei, reflecting the woes of the Japanese economy, would have eroded 43.8% to end at 56.2.

However, where they start and finish is only one part of the story that wouldnt indicate just how volatile the markets have been. We measured the ups and downs of the market in two ways, looking at the highest and lowest values that each of the indices held through the decade and the standard deviation a statistical tool that can be used to measure volatility of the indices through the decade.

Surprisingly, the Sensex showed up as the least volatile of all the indices on both counts. Of course, thats bad news if you are essentially a speculator, but is truly reassuring for the average investor. The Sensex had the lowest standard deviation of 14, much lower than the Dax at 73 and the Dow at 62. The Nikkei, the Hang Seng and the FTSE all had standard deviations in the 20s and 30s. The differential between the highest and lowest points of the Sensex through the decade was also the lowest at 57, marginally below the Nikkei at 63 and the Hang Seng at 76. The Dax showed the highest differential of 237, with the Dow following at 188.

What about other emerging markets? After all, those are the ones that Indian bourses compete with for portfolio investments. At first look it might seem that the Brazilian, Mexican and Russian markets beat ours hollow. All of them show handsome returns over the decade. But theres a catch. To begin with, the increase seems exaggerated because of particularly low values in the early 90s. Further, each of them showed very high values of standard deviation, read volatility.

The Mexican IPC showed a deviation of around 82, the Russian RTS index a higher 143 and the Brazilian Bovespa an unbelievable 1168, all clearly far more unstable than either the Indian or other major indices.

This seems to confirm the cliche about high gains going hand in hand with high risks, with most high gain markets also being the most volatile. The Indian stock exchange, however, appears to have found the happy middle ground of delivering reasonable returns without exposing investors to a high degree of volatility.


Active Member
Very informative article. Perhaps that is why everybody talks of nifty futures. I have not heard a single sould talking of sensex futures.

Most nifty stocks are likely to be good for both trading and investing. Perhaps if from among them you could point out which are good for each category and which for both it would be a great help.

I mainly track volatility through Bollinger bands or chakin. If you can recommend any other, please do. Thanks.

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