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The Importance of Stock Market Indicators

The Importance of Stock Market Indicators

  • Wilson Tomás • Research Analyst at Banco Big Moçambique

Stock market indicators, also known as market indicators, are economic indicators specific to each country. They can be weighted by the market value of the companies or by the price of the listed shares that make up the index.

They are generally identified by capitalisation and sectoral segregation of companies. These indices are regularly followed by the media and investors and can even be used as an investment instrument.

Each index has its own calculation method, although the weighted average is the main basis for these calculations, since the values are derived from a weighted average of the total value of the portfolio.

As such, price-weighted indices will be more affected by changes in stocks with higher prices, while market capitalisation-weighted indices will be more influenced by changes in the stocks of the largest companies.

Some indices are based on market capitalisation weighting, revenue weighting, asset price fluctuations, among others. Weighting is a method of adjusting the individual impact of items in an index.

The growth in the use of these indices as a reference for investment decisions by participants in the Mozambican capital market is conditioned by the increase in the number of listed companies over the next few years

The indices have specific characteristics that focus directly on certain market segments. For example, they can represent sectors of activity or maturities, in the case of fixed-income securities, or they can be created to represent geographical segments of the market, such as those that track emerging countries or blocs or shares in the main markets. This gives investors a simplified view of a large market sector, without the need to examine each asset individually.

Indices also act as benchmarks, i.e. they serve as references for various objectives in the financial markets. A wide range of investors use market indices to track financial markets and manage their investment portfolios.

Indices are deeply integrated into investment management, being used as benchmarks for comparisons of asset performance, especially the performance of investment fund asset managers.

A notable example are stock market indices, which offer a quick overview of the performance of various stocks listed on capital markets in different countries, regions and sectors.

In the United States, we have the Dow Jones (made up of the 30 leading companies in the different sectors of American activity), the S&P 500 (made up of the 500 largest shares by market capitalisation) and the Nasdaq (made up mainly of shares in technology companies). These benchmark indices are a good representation of the country’s stock market and exist in every international financial market that has a stock exchange.

Investors tend to adopt sectoral index strategies that react differently to economic cycles

There are also comprehensive fixed-income indices used by debt investors and Exchange-Traded Fund (ETF) managers as a benchmark to assess their relative performance. One example is the Bloomberg Aggregate Bond Index, made up of government and corporate bonds.

Analysing bond market indices is crucial for three main reasons. Firstly, the bond portfolios of pension funds and individual investors have grown substantially in recent years, with flows into fixed income funds outstripping inflows into equity funds.

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Second, benchmarks for bond index funds have become popular, as many bond portfolio managers have been unable to beat the gains made on bond indices, similar to the behaviour of equity managers. Thirdly, due to the magnitude and importance of the bond market, substantial research has been carried out and bond market indices provide accurate and timely measurements of the risk/return characteristics of these assets and the market.

Investors often choose to invest in indices rather than individual stocks or bonds, so that they can achieve greater degrees of diversification. Investing in a portfolio of index funds can optimise returns and balance risks.

For example, investors tend to adopt sector index strategies that react differently to economic cycles to protect the value of their portfolios, or invest 50 per cent of their funds in stock indices and the other 50 per cent in bond indices.

In other words, the use of funds that use indices as a benchmark has greatly improved access to instruments that make it possible to better manage the diversification of investments, both for individuals and institutions.

The Mozambique Stock Exchange (BVM) has a global index, IBVM_Global, which measures the performance of the capital market as a whole, considering equity securities (shares) and debt securities (bonds). In addition, BVM has two other indices: IBVM_Acciones and IBVM_Obligações, which group together the instruments listed on the Mozambique Stock Exchange by their characteristics.

The growth in the use of these indices as a reference for investment decisions by participants in the Mozambican capital market is dependent on an increase in the number of listed companies over the next few years. This increase will be necessary to help choose the instruments that best suit the risk profile of each investor.

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