TITLE - STOCK MARKET BEHAVIOUR: EVIDENCES FROM INDIAN MARKET IN CEMENT INDUSTRY

TITLE - STOCK MARKET BEHAVIOUR: EVIDENCES FROM INDIAN MARKET IN CEMENT INDUSTRY

(Subject Area: Finance)

Chapter 01

1.1 Introduction

An efficient market is defined as a market where there are large numbers of rational, profit maxi misers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants. Hence in efficient market the prices reflect the effects of both the information pertaining to the events occurred in the past as well as those which are expected to occur in the near future based on the information estimates. So in efficient markets, due to competition among the intelligent participants, it is assumed that the actual price of a security is somewhat aligned to its intrinsic value at any point of time. But there are various evidences of increasing number of ‘anomalies’ existing in the stock markets internationally which generally raises doubt on the presence of Efficient Market Hypothesis.

Over the years, many researchers and academicians have studied the behavior of the stock market covering almost every developed and developing economies, for a clear understanding of the market efficiency and thus raised many interesting issues, which are still subject to controversies.

 In an emerging stock market like India, investment analysts and market participants are continuously in search for investment strategies that can outperform the market. Efficient Market Hypothesis (EMH) rules out the possibility by anybody to consistently earn extra normal return in an efficient stock market. According to this hypothesis securities are correctly priced and return is solely determined by the amount of risk one assumes (as per the standard Capital asset Pricing Model – CAPM). However a plethora of empirical studies doubts such a phenomenon and documents the availability of extra normal returns by using investment strategies based on firm specific variables such as size, leverage, price earnings ratio , book equity to market equity ratio ,  etc. These empirical evidences have been commonly cited as anomalies to CAPM based on company fundamentals and popularly known as the size effect (small capitalization stocks outperform large capitalization-stocks), leverage effect (high debt-equity stocks outperform low debt-equity stocks), Price Earnings Effect (low p/E stocks outperform high P/E stocks) and value effect (high book equity to market equity stocks outperform low book to market equity stocks).

Two schools of thought have emerged in search for possible explanation of persistent departure from the standard CAPM. One argument is that CAPM is mis-specified; there is/are some missing risk factor(s) which beta fails to capture. Hence there is a move towards multifactor asset pricing framework as specified by researcher Fama and French. The other school blames the investors' irrationality for the existence of the phenomenon. Whatever be the cause, the presence of these CAPM anomalies provides gainful investment opportunities to the investing community. The robustness of size and value effects in US stock market motivated Fama and French to suggest the inclusion of a size and value factor in asset pricing model. A number of research studies have explored the economic feasibility of investment strategies based on fundamental variables, but most of these studies relate to US and other mature markets. Similar evidence for emerging markets including India is limited and more recent in origin. Moreover no attempts have been made in Indian context to seek the opinion of practitioners (e.g. equity analysts, mutual fund managers and investors at large) and simultaneously perform secondary data analysis to substantiate (or disprove) their perceptions about Indian stock market in general and performance of company fundamentals based investment strategies in particular. The present study attempts to fill up this gap.

Post 2008 global financial crisis that originated in the U.S financial markets, year 2009 saw a major decline in global trade. The crisis had a spill over effect across the world leading to reduction in demand and trade flows. Eventually there was sfinanceinkage in the construction sector, which leads to a decline in the production of cement in most of the advance economies of the world.

However, despite the effects of the global financial crisis and a poor 1% growth in 2008, world cement production for 2009 was 3 billion tonnes, increasing by 6.4% compared to 2008. China reached a record coverage of global production (54%) with an increase in production of 17.9% up to 1.63 billion tonnes. This proved to be of major importance when determining the overall positive world performance. India, by far the second largest producer, confirmed a growing trend to 187Mt with, however, poor increase of 1.9% when compared to 2008 growth of 7.5%. The expected effects of the economic downturn were severe in the U.S. and Japan, adding to the already negative growth results of 2008. In these two countries, cement production fell by17% and 13%, respectively. A collapse in output volumes in the Russian Federation was characterized by a decline of more than 15% (to 44.3Mt) in addition to the 12%drop from the previous year.1 The graphs2 below show the World cement production by region from the year 2000-2009 and the world cement production by main countries.

To read more…….

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