Annual average returns and market returns for growth, income, and value stocks (2005-2015)

By Riya Jain and Priya Chetty on December 17, 2020

The global financial crisis of 2008 caused by financial turbulence in the sub-prime mortgage sector led to the bankruptcy of Lehman Brothers in 2008. It also resulted in widespread economic and financial distortion. Tight monetary policies, high volatility in financial markets, and a decrease in FDI inflows followed in the next few years. It caused a reduction in returns for investors while increasing the risks (Dullien et al., 2010;  et al., 2018). Due to these diverse impacts and severe threats to investors, there is a need to examine the annual average returns and market returns of stocks in presence of these crises.

The previous article assessed the performance of 303 stocks from the BSE 500 for the period 1st April 2000 to 31st March 2005. It revealed that for the chosen time period, value stocks yielded better returns, but at risk of high volatility. This article assesses the annual average returns and market returns of stocks in before and after the financial market crisis i.e. for the period 1st April 2005 to 31st March 2010 and 1st April 2010 to 31st March 2015. A detailed explanation of the methodology is presented here. The findings of this analysis will help investors decide which stocks are most worthy of investing in the aftermath of a crisis- growth, income or value stocks.

Comparison of annual average returns and market returns from April 1, 2005, to March 31, 2010

Growth stocks

The period April 1, 2005, to March 31, 2010, in case of growth stocks witnessed a higher average return compared to the market return. Mean value shows that there has been an increase in the annual average returns from 0.280 to 0.471. Due to the presence of high risk, the minimum value decreased to -0.481 but along with it, the possibility of maximum returns has also increased to 1.228. Being the source of substantial returns, growth stocks’ average return was more than the market return i.e. min -0.583 and max 0.891. Although there was a slight rise in the variability and standard deviation to 0.394 and 0.628 respectively, the presence of extreme value and asymmetry decreased. Skewness level is between 0 and -0.5, representing low negative skewness while kurtosis value has increased to 2.321. Thus, compared to the period of 1 April 2000 to 31 March 2005, there has been an improvement in the performance of growth stocks.

VariableMeanSt. deviationMinMaxVarianceSkewnessKurtosisMedian
Average Return0.4710.628-0.4811.2280.394-0.4762.3210.634
Market Return0.3370.557-0.5830.8910.311-0.9402.6480.386
Table 1: Descriptive analysis of growth stock returns

Income stocks

Income stocks depict similar behaviour i.e. the mean value of average annual returns increased to 0.363 compared to 0.253 in the previous period. These stocks provide a steady but low income. Therefore, compared to growth stocks, the mean value of the annual average returns is less. Furthermore, the standard deviation and variance level show an increase in volatility in income i.e. 0.751 and 0.564 which led to a decrease in the minimum return to -0.645 but increase in maximum return to 1.463. Skewness level with a value of 0.202 has the low positive skewness depicting the reduction in asymmetry from the distribution of return. Kurtosis value of 2.454 shows the reduction in the presence of the extreme value over time for the income stock returns.

VariableMeanSt. deviationMinMaxVarianceSkewnessKurtosisMedian
Average Return0.3630.751-0.6451.4630.5640.2022.4540.298
Market Return0.3370.557-0.5830.8910.311-0.9402.6480.386
Table 2: Descriptive analysis of Income stock returns

Value stocks

Value stocks show a decrease in performance as the mean value of stocks for the period fell to 0.373 compared to the previous period value of 0.462. Even the minimum and maximum value of the return has also decreased to -0.624 and 1.056. Furthermore, though the presence of the volatility in the market has reduced i.e. standard deviation and variance have decreased to 0.705 and 0.497 but still kurtosis level shows the increase in the presence of the extreme value in the distribution as value has reduced to 1.797. Furthermore, the skewness level of the stocks is -0.299 representing the presence of low negative skewness. Compared to the performance of growth and income stocks, with the availability of average risk, the average annual returns level is though less than growth stocks but more than income stocks. Hence, due to the increase in undervaluation of stocks, the return derived from the stocks has reduced for the current period and led to degrading the performance of value stocks in comparison to the income and growth stocks.

VariableMeanSt. deviationMinMaxVarianceSkewnessKurtosisMedian
Average Return0.3730.705-0.6241.0560.497-0.2991.7970.218
Market Return0.3370.557-0.5830.8910.311-0.9402.6480.386
Table 3: Descriptive analysis of Value stock returns

Comparison of annual average returns and market returns from April 1, 2010 to March 31, 2015

Growth stocks

For period April 1, 2010, to March 31, 2015, growth stocks have shown the degradation in performance as the mean value has decreased to 0.277 compared to the raised average annual returns value of 0.471 but is more than the market return. This drastic fall was in stock prices was associated with the global financial crisis and crude oil prices plunge of 2008. This volatility in the market further led to a reduction of the maximum value to 0.842. But also improved the minimum level by raising the value to -0.237. Variability in the returns earned by the investors has also decreased by a reduction in the standard deviation and variance level to 0.432 and 0.187. Skewness value of 0.162 being between 0 and 0.5 shows the presence of very low positive skewness representing the close to symmetric distribution but the kurtosis value decrease to 1.654 also state the existence of more extreme values. Hence, although the fluctuation in the returns has reduced for the investors, the degradation of the stock’s performance also decreased the scope of earning a higher return.

VariableMeanSt. deviationMinMaxVarianceSkewnessKurtosisMedian
Average Return0.2770.432-0.2370.8420.1870.1621.6540.216
Market Return0.1180.257-0.2770.3660.066-0.6612.1180.164
Table 4: Descriptive analysis of growth stock returns

Income stocks

Bearing the impact of the global financial crisis and the crude oil plunge, the income stocks mean average return fell to 0.176 compared to the value of 0.363 in the previous period. Having a low risk and steady source of income, the mean return is also less compared to the growth stocks. Furthermore, the maximum value of stocks has reduced in comparison to the growth stocks and the previous period i.e. to 0.749 but this also led to an improvement in the minimum return level to -0.356. Standard deviation and variance level also show a reduction in variability of market i.e. having the value of 0.400 and 0.160. Skewness value of 0.169 also shows a reduction in asymmetry from the distribution due to the presence of very low positive skewness. Kurtosis value of 2.291 however in comparison to the previous period shows the presence of more extreme value but as the value is greater than 2, thus they are less than the growth stock extreme value. Hence, income stocks show that though financial crisis and crude oil reduced the income generation opportunity for the investors but along with it, there has been a decreased in the variability of returns too.

VariableMeanSt. deviationMinMaxVarianceSkewnessKurtosisMedian
Average Return0.1760.400-0.3560.7490.1600.1692.2910.097
Market Return0.1180.257-0.2770.3660.066-0.6612.1180.164
Table 5: Descriptive analysis of Income stock returns

Value stocks

Value stocks have witnessed a drastic change with the rapid fall in mean value to 0.064 from 0.373 in the previous period. Even the maximum return level decreased to 0.377 compared to 1.056. Along with the drastic fall, these undervalued stocks also had the lowest return for their investors. However, the minimum value of stocks increased to -0.413. The variability in the market is lowest compared to income and growth stocks i.e. variance and standard deviation value is 0.101 and 0.317. The skewness of -0.584 depicted presence of moderately negative skewness and the kurtosis value of 2 depicted the reduction in extreme values in comparison to the previous period. Hence, for the period of April 1, 2010, to March 31, 2015, value stocks have underperformed but more stability is derived.6

Growth stocks are source of earning even in crisis

The global financial crisis of 2008 deteriorated the performance for all the financial stocks and increased the risk of loss due to the presence of high volatility. Despite this, growth stocks not only provided investors with better earning in comparison to income and value stocks but also behaved as a sustainable source of investment with low variability present in the market for the period 1st April 2005 to 31st March 2010. Thus, the analysis shows that even in the presence of crisis like a global financial crisis or crude oil plunge of 2008, the growth stocks is the source of having beneficial investment.

This article focused on comparing the performance of stocks in presence of crisis. However, the Bombay Stock Exchange witnessed various crashes which led to hampering the earning opportunity for investors and degrading the performance of stocks.

References

  • Bencivenga, C., D’Ecclesia, R. L., & Triulzi, U. (2012). Oil prices and the financial crisis. Review of Managerial Science, 6(3), 227–238. https://doi.org/10.1007/s11846-012-0083-z
  • Dullien, S., Kotte, D. J., Marquez, A., & Priewe, J. (2010). The Financial and Economic Crisis of 2008-2009 and Developping Countries. In United Nations Conference on Trade and Development and Hochschule fur Technik und wWrtschaft Berlin. http://unctad.org/en/Docs/gdsmdp20101_en.pdf
  • Sathyanarayana, S., Harish, S. N., & Gargesha, S. (2018). Volatility in Crude Oil Prices and its Impact on Indian Stock Market Evidence from BSE Sensex#. SDMIMD Journal of Management, 9(1), 1–23. https://doi.org/10.18311/sdmimd/2018/19997
Riya Jain

Discuss