The methodology

A. Srikanth

THE style preferences of the market were analysed over five different time periods over the last two years using the BL-250 portfolio of stocks. The phases were unique, in that they were marked by major market/economic/political developments, which had significant impact on the market.

First, in the period between April and October 1998, the market generally suffered from the impact of economic sanctions due to the Pokhran nuclear blast and from the UTI debacle. The BL-250 Composite Index declined 25.60 per cent in this period. Second, between October 1998 and March 1999, the pre-Budget rally in the market resulted in the BL-250 gaining 27 per cent.

Third, the period between April and September 1999 witnessed economic recovery and the impact of the Kargil conflict. However, the positive effects of the economic recovery more than compensated the adverse impact of the Kargil conflict. The GDP growth rates rose from 4.70 per cent in the last quarter of 1998-99 to 7.20 per cent in the second quarter of 1999-2000. With the result the BL-250 Composite Index went up 68 per cent.

Even as the market was buoyed by the increase in GDP growth rates, which continued to rise even after the second half of 1999-2000, the bull run in the Nasdaq fuelled the acceleration. Propelled by the information technology sector, the BL-250 Composite Index rose 61 per cent between September 1999 and February 2000. Both the BL-250 Composite Index and the BL Technology index touched their highs on February 21, 2000.

The crash in the Nasdaq market triggered a downtrend in the domestic market in the subsequent three months between end-February and May. The downtrend did not halt until the end of May 2000. As a sense of gloom set over the information technology sector, rumours of an industrial slowdown also haunted the market during this period.

These five periods that served as some turning points for the market were taken up for the study. For the analysis, the BL-250 stocks were categorised into growth and value stocks, based on the sectors. While the FMCG, pharma, information technology and telecom stocks were categorised as growth stocks, those comprising capital goods, automobiles and commodities were categorised as value stocks. Totally, 60 companies were considered in each category.

Growth and value have emerged as the important criteria in equity investment styles over the last two years. The returns of these two categories over different periods were compared to evaluate which investment style gave better results. But it is possible that the results are influenced by the `size effect'. Empirical research has shown that, on an average, small-cap stocks tend to outperform the large-cap ones during certain periods.

In other words, the presence of large and small market cap stocks within the growth and value categories could vitiate the overall results. For this purpose, the growth stocks sample was further segregated into large-cap and small-cap stocks. Such a segregation would allow an unbiased appraisal of the performance of growth and value stocks.