Indian Stock Market

Indian Stock Market

Value investing and growth investing in the stock market involves different concepts. The former entails searching for a firm and calculating its actual intrinsic value and then purchase the stock with less money when it is on sale in the market. By buying the stock at a discount, a profit can be made if the stock is sold when it has reached its value. Potential value investors look for tools such as a low PE ratio, lower price average to book value, and higher dividends yields. Creta et al., (2019), noted, on the other hand, growth investing is an investment strategy in which investors focus on raising investor’s capital. It mostly involves investing in growth stock of startup firms that expect an increase in their earnings above-average rate, considering the industry or the market average (Li et al., 2017).

Most investors prefer growth investing since purchasing stock from startup firms entails profitable returns in case the firms are thriving. Both value and growth investments are collective in the Indian market. Trading in the Indian market occurs in the Bombay Stock Exchange and National Stock Exchange. The two stock exchange markets have been in existence since 1992 following specific trading mechanisms, settlement process, and trading hours (Perez et al., 2017)). From 2014 to 2019, the Indian stock market has shown exponential profitability for both value and growth investors. However, given the fluctuations in the stock market, one investment option outweighs the other. The purpose of this paper is to examine both value and growth investment in the Indian stock market to reveals which one performed better from 2014 to 2019.

By February 2020, there were 5 518 firms listed by BSE, while 1,799 firms were listed by competitor NSE by December 31, 2019. From the total listed firms, around 500 composed 90% of market capitalisation with others having highly liquid shares. Most of the large and small firms are listed on the two exchanges. Even though BSE is older in the market, NSE has the largest stock market, considering the volume. Further, NSE is a more liquid market also though both are comparable in terms of market cap. In the Indian market, investors prefer growth stock for startup firms. The small companies involved in growth stock are those that indicate a high potential for development.  Growth investment may lead to massive wealth accumulation for investors via capital appreciation (Hueng et al., 2014).

Problem Statement

In the Indian stock market, growth investment may be riskier than value investment due to the developing feature of an issuing firm. In the Indian market, growth stock investment is analysed based on price-to-earnings ratios. Firms that have a high price to earnings ratio are likely to have high returns on total investment. For value investing in the Indian market, potential investors are always interested in real or intrinsic value. By using different valuation techniques such as discounted cash flow analysis, the market value is calculated. If it is below the industry average, then the investors purchase the stock. After then, the investors build stock discount and wait until the stock reaches its intrinsic value (Miller et al., 2018)

Interestingly, despite the high risks involved in value investing, approximately 50% of the potential investors in the Indian market still spend. For the past few years, the number of investors in both growth and value stocks has increased significantly, given the high profitability rate. The price of investments is forecast to grow despite the risks involved.

Research Objectives

• To analyze the performance of value stocks. By using different valuation techniques such as discounted cash flow analysis, the market value is calculated.
• To examine the performance of growth stocks using. In the Indian market, growth stock investment is analyzed based on price-to-earnings ratios.
• To compare value investing and growth investing in the Indian stock market for a period from 2014-2019.

Research Questions

• Did value invest outperform growth investing in the Indian stock market, and how?
• What are the indicators of value investing and growth investing performance?

Section 2: Literature Review

The model of the growth stocks and value stocks dates back to the 1930s when the financial researchers established the idea of fundamental analysis in equity portfolio selection. Investors earlier trusted on qualitative factors like the quality of a company’s management to make investment choices (Gan et al., 2016). With the development of the value growth idea, the financial researchers and the investment experts have therefore advanced the understanding that the value stocks produce higher returns equated to growth stocks. The following literature review explains the evidence on value and growth performance that has been acknowledged in several earlier studies undertaken in different stock markets. The documented evidence on why the value stocks tend to be more superior in most markets.

2.1 Classification of Stocks into Value and Growth

Growth and value stocks can be defined using several financial variables like E/P, P/S, and B/M. According to Creta et al., (2019), there is no harmony either in academia or in investment practice as to which of these variables best distinguishes between a value growth stock and value stock. However, B/M and E/P ratios are likely to have a more reliable explanatory power on the stock returns and are therefore primarily used by both financial investigators and investment analysts in classifying stock into growth and value.

According to Perez et al., (2017) the B/M is often the ratio of the book value per share from the most current balance sheet data to the peak current market price of a given stock. A succession study by Hueng et al. (2014) recommends that the association between the B/M ratio and the subsequent earnings and default risks of USA banks in the recession periods. The banks that have higher B/M ratios have lower future earnings and higher earnings volatility consistently, besides these organizations, therefore, have higher loan delinquency and more charge offs. Trevino et al., (2014) those stocks with higher E/P ratio and profit margins generate higher returns for the next period. Some of the early evidence of a relationship between P/E and stock returns finds that lower P/E stocks consistently produce higher returns than the top P/E stocks. Therefore, correcting the effects of P/E on returns for market risk still finds a significant negative relation between P/E ratios and average returns above the predicted ones.

A collection of research that has been conducted by some authors on growth versus value investing in various stock markets has proposed the following. According to Hueng et al., (2014), the Nigerian stock market indicated that the value investment has multiple benefits over the growth investment. Over several years, the value investing has outperformed the growth investing on a value adjusted basis Hueng et al., (2014). The value investors, therefore, argue that the short term focus can time and again push stock prices at some lower levels, which are likely to create excellent buying opportunities for the value investors. In India’s value investing, there are several strategies in the stock market; the value investing is a proven strategy in India’s stock market that created massive wealth for several investors who decided to follow this strategy with discipline (Pandey et al., 2016).

Research by Miller et al., (2018) recommended that the Korean stock market allowed the investors to decide on between the technical investing and fundamental investing. The theoretical analyses are often used to locate the stocks with solid fundamentals, and technical reports are used to identify the absolute value to pay. These investments do not always guarantee speedy returns, but in case they do, they pay well. The growth stocks are often the shares within those companies that are having substantial momentum; they often use their available resources to expand their service or product to breed considerable revenue and, therefore, often take over that specific the market. According to Zaremba et al., (2019), the United Arab Emirates’ growth stocks usually are higher priced than the broader market. Therefore, investors are generally eager to pay a higher price to the earnings multiples (P/E) with more excellent prospects of selling them at more significant prices as the company continues to grow. Zaremba et al. (2019) found that the Thailand stock market presented lower-priced value stocks than the broader market. The severe idea that lies in value investing is that those stocks of good companies will generally spring up in time whenever the real or actual value is known by shareholders (Gan et al., 2016).

2.2 Efficient Market Hypothesis (EMH) Definition

The Efficient Market Hypothesis (EMH) essentially says that all known information about investment securities, such as stocks, is already factored into the securities^.  Therefore, assuming this is true, no amount of analysis can give an investor an edge over other investors, collectively known as “the market” (Li et al., 2017).

EMH does not require that investors be rational; it says that individual investors will act randomly, but as a whole, the market is always “right.” In simple terms, “efficient” implies “normal.” For example, an unusual reaction to unusual information is reasonable. If a crowd suddenly starts running in one direction, it’s normal for you to run in that direction, even if there isn’t a rational reason for doing so (Pandey et al., 2016).

According to Choi et al. (2015), the value stocks often guarantee higher returns than the growth stocks, but a value position can always go against the investor. The value trap typically explains this, and the investor may buy earnings growths that are very unsafe (Li et al., 2017). Therefore both the earnings to price (E/P) and the book to price ratio (B/P) can, therefore, come into place. The E/P specifies the estimated earnings growth. Still, the price in that particular ratio also discounts for the risk of that specific growth, the B/P, therefore, specifies that risk for any given. Kask, (2010) recommended that analysis by hundreds of different significant market move events suggests over the past thirty years, the observation of varying value stocks have significantly outperformed both the market average and growth stocks during market declines. Therefore, the suggestion for investment experts is that following a value strategy does not lead one to assume higher sensitivity to the market’s unfavorable conditions.

Section 3: Research Methodology

3.1 Research approaches

Descriptive research is a research method that describes the nature of the population of phenomena being researched. It focuses on the element of answering the question of what rather than why if the subject of study.  Since the research will be done on this topic is limited in nature, the research will use an analytical method.  As mentioned by Kothari 20014, systematic research is conducted when there is not enough data present on the same topic, and a lot of the in-depth data needs to be gathered to find the answer to the specific research question under investigation. For this research, the method will be descriptive in describing the phenomena. Information regarding the type of investments in India; and its challenges and advantages will be analyzed in an analytical approach.

The deductive reasoning research works to explore knowns theories or phenomena and tests if that give argument is valid in given circumstances. In other words, the deductive approach involves the formulation of hypothesis and their subjection to the element of testing during the research process, and the study will use this method in testing the hypothesis surrounding each kind of investment associated with the Indian situation.

Positivism epistemology is used in describing the purpose of the study of society that relies specifically on scientific pieces of evidence like experiments and statistics in revealing the true nature of the operation of an organization. Positivism epistemology is mainly concerned with the kind of knowledge and the ways of understanding stand learning about social reality. The study will make the use of this method in explaining the elements of the Indian Stock Market.

3.2 Research methodology

The research methodology will be quantitative. An in-depth analysis of the topic is critical in the gaining of a situation or the topic understanding through the use of online surveys in 10 different companies. Since the study is descriptive, a quantitative methodology will be used to quantify the behavior of the Indian stock markets through a review of the behaviors and other variables in making a generalized opinion from the largest population. The method will be employed to understand the independents and the dependent variables in a given community. A survey will be sent to the various investment companies and individuals in the Indians stock market and the employees of the stock market of India to gain a broader and in-depth perspective of the research questions and the hypothesis.

3.3 Data collection

The principal method of data collection will be the secondary method of data collection. The data about the subject of the study will be obtained from the Bloomberg database and DataStream. Besides, the data will also be collected from the ten different companies, 5, being the values investment company, and the other 5 being growth investment companies.   In doing this, all the data relating to the finances will be collected for five years every year. The information will then be analyzed to inform the study.

• Data analysis

1. financial analysis

Once the financial information for the five years in the 210 different companies has been obtained, thematic data analysis will be considered. The survey will be analyzed so as to avoid any element of bias in the analysis process. Key financial ratios will be explained to establish the actuals findings from the study. Economic rates that will be examined include; Debt-to-Equity Ratio, Current Ratio, Quick Ratio, Return on Equity (ROE), and Net Profit Margin.

1. Statistical analysis

Correlation and regression analysis will be used for the study of the collected data. Correlation analysis works for qualifying the degree and direction to which two variables (dependents and independents) are related. It, however, does not fit a line through the data points but is a means of computing a correlation coefficient that shows how variables tend to changes when the other does. On the other hand, regression finds the best fit lines that predict the dependent variables from the independent variables. The decision of which variable calls dependent and which calls independents is critical for the regression. The two will be used ineffectively analyzing the variables from the data collected and in coming up with a conclusive information

1. Ethical Consideration

Ethics is considered a peer of any study. When conducting a survey, there is a need for the researcher to take consideration of all the research participants, collected data, and the researcher themselves to comply with the necessary ethical considerations and standards.  The study researcher is from India, and the ethical review for any study should be employed during the study.  The research ethics will ensure that participants are confident about the information they will be giving and have a stronger sense of respect from the researcher. First, the respondents will be given the freedom to exist at any point in the study. Consent will be given to all individuals involved in the survey prior to the study. This will be done more voluntarily. They will not be tied to finishing the whole research incase they feel uncomfortable with it. The use of official language English will be adhered to, and there will be no other languages used except English. Besides, the data that will be used for the study will be gathered from the official website of the 10 companies under consideration.  The participant of the survey will not be misled in any findings from the research.

Time Plan and Resources

            The research was started in March with the identification of the gap. This was then followed by the identification of the gap in April and the development of the research proposal in May. However, the research will proceed to the gathering of the literature review in the moths of June. In the same month, the finalization of the research questions and objectives will be conducted. The months of July research methodology and select companies will be looked into. The process of the data collection analysis, which are the most critical aspect of the study will be done in July and September. October will be used for draft findings and drafting of study limitations. Lastly, final review and submission will be made in November.

Scope and Limitations

The study will be undertaken on the top investment companies in India. The researchers take consideration of all the ethical issues related to obtaining secondary information and survey. This survey will be conducted in 10 different companies where the financial statement will be reviewed for the past five years. However, the study will make the basis of future research in value and growth investments among different companies in India.

References

Battisti, E., Miglietta, N., Salvi, A., & Creta, F. (2019). Strategic approaches to value investing: a systematic literature review of international studies. Review of International Business and Strategy.

Byun, J., Choi, H. S., & Choi, P. M. S. (2015). Sentiment, growth and value investments: evidence from Korean Stock Listings. Investment Management and Financial Innovations, 12 (3), 142-148.

Emm, E. E., & Trevino, R. C. (2014). The changing risk-return characteristics of value and growth investing. Journal of Financial Planning, 27(11), 55-60.

Gottesman, A. A., Jacoby, G., & Li, H. (2017). Value investing or investing in illiquidity? The profitability of contrarian investment strategies, revisited. Financial Innovation, 3(1), 34.

Kask, K. (2010). THE INFLUENCE OF INVESTORS’BEHAVIOUR AND ORGANISATIONAL CULTURE ON VALUE INVESTING: THE CASE OF ESTONIAN STOCK MARKET. Europe, 31, 78.

Wang, L., & Gan, L. (2016). Theory Research of Value Investing Based on Market Position. Applied Economics and Finance, 3(2), 146-156.

Mikutowski, M., Kambouris, G. D., & Zaremba, A. (2019). A note on value investing in the UAE stock market. Journal of Research in Emerging Markets, 1(2), 33-38

Pandey, P. K. (2016). PRICE-EARNING (P/E) RATIO AS A VALUE INVESTING TOOL.

Perez, A. (2017). Value investing in the stock market of Thailand. International Journal of Financial Studies, 5(4), 30.

Pettengill, G., Chang, G., & Hueng, C. J. (2014). Choosing between value and growth in mutual fund investing. Financial Services Review, 23(4), 341.

Prondzinski, D., & Miller, M. (2018). Active Versus Passive Investing: Evidence From The 2009-2017 Market. Journal of Accounting and Finance, 18(8), 119-143.

References

Chatziantoniou, I., Gabauer, D., & Marfatia, H. A. (2020). Dynamic Connectedness And Spillovers Across Sectors: Evidence From The Indian Stock Market (No. 2020-04). University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group.

Groww, G. (2020). Growth Stocks – Features, Benefits and Alternative Investment Option. Retrieved May 9 2020, from https://groww.in/p/growth-stocks/