Trend analysis of average returns of BSE stocks (2000-2010)

By Riya Jain & Priya Chetty on December 9, 2020

The trend in the stock market refers to the graphical representation of stock price movement. It indicates the performance of the market. It takes into consideration past movements of the stock prices or returns. It identifies the current nature of the stock and helps predict its future performance.

For example, the uptrend of stock prices shows that there is an improvement in the performance and the prices of the stock are increasing. The existence of positive sentiment for the desired stock enhances the probability of earning more in future. Therefore, investors buy more of these stocks (shown in Figure 1).

The global financial crisis of 2008 led to a large amount of financial turbulence and global imbalances which not only distorted the financial status of the country but also the economic condition. Thus, the existence of high volatility raised the risk probability for the investor along with decreasing the earning opportunity for investors (Dullien et al., 2010). As the performance of each stock varies with the available condition thus, the previous article focused on categorizing the stocks. Considering this aspect, the current article focuses on examining the nature of stocks via trend in order to determine the influence of the crisis on the investment decision of investors.

Herein, an examination of different stocks (growth, income, and value) returns was done and their movement is compared with the market value of the Bombay Stock Exchange (BSE). The annual average returns of a stock define the earning possibility of an investor from a particular investment whereas the market return states the return-deriving capacity of all stocks traded in the market. Thus, their comparison enables the investor to derive more information about the efficiency of their investment.

In this analysis, the trend of the average return and market return of 303 companies on the BSE index is assessed in 5 different time periods:

  1. April 1, 2000 – March 31, 2005 (pre-recession)
  2. April 1, 2005 – March 31, 2010 (during the recession)
  3. April 1, 2010 – March 31, 2015 (post-recession)
  4. April 1, 2015 – March 31, 2020 (post-oil prices crash)
  5. April 1, 2000 – March 31, 2020 (cumulative)

This article presents the analysis for the first two time periods, i.e. April 1, 2000 – March 31, 2005, and April 1, 2005 – March 31, 2010.

The trend for the period April 1, 2000, to March 31, 2005, to calculate average returns

The graph below represents the trend analysis of the average returns of growth stocks for the period 2000-2005.

  • Growth stocks: For growth stocks, there has been a rise in returns as compared to the market returns. The return was low as compared to the market return in 2000, but there was a gradual rise from 2001 until 2004 when this uptrend witnessed a slight fall i.e. to 0.335 against 0.170 market return. Thus, growth stocks companies made adequate financial decisions leading to high return-yielding performance.
  • Income stocks: These stocks tend to have a slightly high average return compared to the market return. While the return was low in 2000, it rose from 2001 until 2004 to adjust against the volatility of the market. However, later due to poor financial decisions and a non-growth-oriented perspective, the average return fell to a level below market return.
  • Value stocks: Value stocks in 2000 had a higher average return than the market return in 2000, which increased to -0.111 against the market return of -0.232 in 2001. Since then there is an improvement in the performance of stocks. Further, in 2004, this increasing trend of average return fell and reached at a level close to the market return i.e. 0.179 against 0.170. This continuous adjustment in the average return along with the market return shows these undervalued stocks tend to have the possibility of yielding benefits in future but currently poor decision-making has degraded the performance of stocks.

The trend for the period April 1, 2005, to March 31, 2010

The figure below represents the trend for growth, income and value stocks for the period 2005-2010.

Growth stocks: For the period April 1 2005 to March 31 2010, growth stocks have shown that initially, lack of effective financial decision-making led to average returns below the market return but by 2007, the performance began to improve. In 2005, the average return was 0.673 against a market return of 0.360 which reduced to 0.3000 against 0.386 in 2006. However, in 2007, the average return reached 0.634 against 0.630 increasing to 1.228 average returns in 2009 compared to 0.891 market returns. Thus, growth stocks show that over time due to the presence of risk, there has been a reduction in the profit yielding ability of stocks but with the appropriate decision-making, the performance has improved.

Income stocks: With an average return value of 0.298 in 2005 against 0.360 market return, the performance of stocks has been poor. Further, this degradation of performance increased leading to a 0.461 average return value in 2007 compared to a 0.630 market return. However, with the change in the market condition and financial decisions marking, the performance of the stock began to improve and reached the level wherein the average return is higher than the market return i.e. 1.463 against 0.891.

Value stocks: The average return was lesser than the market return until 2007 when it increases due to the better performance of undervalued stocks. However, in 2008, the value reduced back to -0.624 against -0.583. The opportunity to earn more profit in future led to creating the scope of better performance hence raising the average return value back to 1.056 in 2009 against 0.891.

Performance of Growth, Income and Value Stocks

For an investor, the comparison of annual average return with market return helps decide whether a particular investment can provide higher returns in the future or not. Herein, the examination of the performance of income, growth, and value stocks during the global recession of 2008 shows that pre-crisis period value stocks were the most efficient means of investment. Post-crisis of 2008, the performance of each of the stocks declined. Income stocks being a secure source of earning provided the highest return earning opportunity. Thus, with the presence of a financial crisis, income stocks provide a source of safe investment to investors.

This article focused on examining the performance of stocks during the global recession but majorly the variation in performance could be seen after the economic recovery. The next article would assess the performance of growth, income, and value stocks post-global recession of 2008 and during the BSE crash and prior to the oil prices crash of 2016.

References

  • Dullien, S., Kotte, D. J., Marquez, A., & Priewe, J. (2010). The Financial and Economic Crisis of 2008-2009 and Developing Countries. In United Nations Conference on Trade and Development and Hochschule fur Technik und Wrtschaft Berlin. http://unctad.org/en/Docs/gdsmdp20101_en.pdf.
  • Sykes, T. (2019). Trend Analysis of The Stock Market.
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