Should stock market indices represent the market or the economy?
While the Hang Seng expands to mirror Hong Kong’s economy, the Straits Times Index narrows its focus, raising questions about the purpose of a national index
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USING an index to represent a large universe is widely accepted as a simple means of understanding how that universe behaves.
The consumer price index, for example, places common goods and services that resident households commonly purchase, such as utilities, food and transport, into a basket. Then, as the value of the basket moves up or down, inflation is said to rise or fall.
That much is straightforward. Yet, when it comes to constructing indices to represent the stock market, things are not so simple, with the biggest problem being whether an index should represent the market or the economy.
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