The Nigerian Stock Exchange during the week announced the expected review of the NSE 30, and the six sectoral indices of the Exchange, which are NSE Consumer Goods, NSE Banking, NSE Insurance, NSE Industrial, NSE Oil & Gas and the NSE Lotus Islamic Indices.
According to the Exchange, these indices are reviewed bi-annually (June and December) except for NSE Pension index that is reviewed once in the year (December). A review of the NSE indices typically involves the entry and exit of listed companies within  the indices. It is closely watched by investors such as index funds, who often use it to mirror their portfolios.
A cursory look at the proposed changes however, reveals a few anomalies as pointed to us by our analysts. The latest changes are already giving some investors the jitters and here is why;
NSE 30 Index
The NSE revealed that it will be bringing in Fidelity Bank Plc, Sterling Bank Plc, Diamond Bank Plc, Cadbury Nigeria Plc , FCMB Group Plc and taking out Conoil Plc, UACN Plc ,Julius Berger Nig. Plc , 7-Up Bottling Co. Plc , The Okomu Oil Palm Plc.
The issue
About 4 banks are joining an index that already includes 8 banks. A total of 12 banks will now be included in an index of 30 listed companies, suggesting an index largely driven by banks. By taking out Conoil, UACN, Julius Berger Nig. Plc , 7-Up Bottling Co. Plc , Okomu Oil Palm Plc, the NSE 30 Index is robbed off a unique diversity that is representative of the larger index.
NSE Consumer Index
The exchange is proposing an entry of Union Dicon Salt and Nigerian Enamelware Plc and exiting companies like Vitafoam Nigeria Plc ,Honeywell Flour Mills Plc,Dangote Flour Mills Plc.
The issue
Union Dicon Salt for example posted an average volume of just 10 shares in the last one month and has recorded less than 5 price changes this year. How it gets into this list baffles us. Nigerian Enamelware on the other hand has changed price just once this year and has an average volume that is next to zero.
NSE Banking Index
Here the NSE is proposing an entry of Skye Bank Plc, Unity Bank Plc and exiting Wema Bank Plc, Diamond Bank Plc.
The issue
Some analyst we spoke to are shocked that Skye Bank, a stock that had before now remained locked at 50 kobo per share and is basically nationalized is being introduced into a banking index that includes the likes of GT Bank and Zenith Bank. Unity Bank is also a relatively smaller bank compared to Diamond Bank which is scheduled to be exited. In fact, more ironic is that Diamond Bank, which is listed to be exited from the banking index is also to be admitted into the NSE 30 index.
Same can be seen all over the proposed index and it appears that the rules or model guiding the entry and exit of companies into indices may be faulty. The NSE does insist this is still a proposal and we hope that someone out there corrects some of these inconsistencies.
How indices are designed
The NSE-30 and NSE Industrial Indices are modified market capitalization index with the numbers of included stocks fixed at 30 and 10, respectively. The Stocks are selected based on their market capitalization from the most liquid sectors. The liquidity is based on the number of times the stock is traded during the preceding two quarters. To be included, the stock must have traded for at least 70 percent of the number of times the market opened for business.
As you can see from above, you wonder how stocks like Skye Bank, Enamelware, Union Dicon gets to be included in some of these indices.
See the proposed composition below;
I think that NSE is basically trying to fortify the indexes with “defensive” stocks – a definition which the NSE has unfortunately extended to include illiquid stocks and stocks whose performance (good or bad) barely elicits investors interest (e.g. Japaul has been at 50k since perhaps 2008). Curious that the lotus Index is admitting the Oil & Gas sector (Total Nigeria) – the sector was out of scope both at the origination and go live dates of the index and the NSE needs to weigh if it wants this index to evolve into an NSE 15 minus unethical stocks index. Seems to me too that GT should now have qualified for admittance to the Premium Board.
I’ll agree it is definitely skewed.