wealthymatters

Sensex Churn

The Sensex churns by over 50% over a 10-year period. That is to say, if we begin a decade with 30 stocks in the Sensex, by the end of the 10-year period, less than 15 of those stocks are in the Sensex. This churn ratio was below 15% in the 1980s, but has steadily risen over the last 20 years.

Moreover, compared to other large emerging markets or the West, the Indian market churns much more (eg. the Dow Jones index (US) has 23% churn, the Hang Seng (Hong Kong) 30% and the Bovespa (Brazil) 39%). So, why has the Sensex’s churn gone up so sharply in the past 30 years? And why does the Sensex (or the Nifty) churn so much more than any other large stock market in the world? Back in the days when the Licence Raj prevailed, the Indian economy was fairly ossified. Unless you turned up in New Delhi with truckload of goodies for the powers that be, your company did not go anywhere. As a result, hardly any companies entered or exited the Sensex during that era.

Then, 1991 came and Manmohan Singh unveiled his ‘New Economy Policy’. Over the next 10 years, the Sensex churned 63% as a host of stalwarts from the Licence Raj tumbled out. So out went Hindustan Motors and Premier with their vintage cars. Along with them a slew of textile companies – Bombay Dyeing, Century Textiles, Futura Polyster – also found themselves ejected from the Sensex. Among the 20-odd entrants into the Sensex were several representatives of the post-liberalisation India, including Infosys, HCL Tech, Satyam Computer, Zee Entertainment, Cipla, Dr Reddy’s, Ranbaxy and ICICI Bank. In effect, the intense churn in the Sensex reflected the revolution that the Indian economy underwent in the decade post-1991.  Read more of this post