A new approach to the business cycle and insights for the allocation of investment asset classes and sectoral stock return along the business cycle
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2020
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2563
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eng
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171 leaves
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b212242
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This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
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National Institute of Development Administration. Library and Information Center
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Korn Talthip (2020). A new approach to the business cycle and insights for the allocation of investment asset classes and sectoral stock return along the business cycle. Retrieved from: https://repository.nida.ac.th/handle/662723737/5526.
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A new approach to the business cycle and insights for the allocation of investment asset classes and sectoral stock return along the business cycle
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Abstract
Portfolio management strategy enables investors to reduce risk and maximize return. Investment in different stocks in equity market helps reducing non-systematic risk however systematic risk of portfolio obviously affected by macroeconomic conditions. Different stages of business cycle associates with changes in macroeconomic environment together with business sentiment and different market expectations which impact performance of specific asset classes in each stage. Equity in different stock sectors responses differently in various economic and business conditions according to the nature of industry. Understanding context of business environment and impact on sectoral stock returns helps investors to foresee potential systematic risk of portfolio and understanding association between business cycle stages and sectoral stock returns will provides insight to the investors on strategic portfolio allocation.
This study provides practical methodology on how to define the stages of business cycle using real GDP growth (YoY, Seasonally Adjusted) as a proxy of aggregated economic activities and using steady zero-growth line together with local maxima and local minima to divide business cycle into 4 stages (expansion, recession, depression, recovery). After defining the stages of business cycle, this study analyzes impact of business cycle on sectoral stock return through changes of market risk premium along the different stages using monthly sectoral stock data from The Stock Exchange of Thailand (SET) during period January 2002 to December 2019 . The analysis is based on Modified CAPM Model with interaction terms between business cycle stage dummies and excess market return over risk free asset to identify business cycle stage beta-value for each stock sector which further bring into Treynor ratio calculation. Recommendations on sectoral stock investment in each stage of buisness cycle are based on risk-adjusted return perspective where the results also proven with portfolio simulation using Markowitz Portfolio Optimization Strategy to define optimal intersectoral allocation ratio in each business cycle stage. Using investment recommendation strategy in this study enables portfolio to achieve higher return than market while reducing volatility risk. The results from this study imply that recovery stage of business cycle is the best timing for investment in stock market due to positive expectation towards future firm earnings. Commerce is the only stock sector which provides positive risk-adjusted return over market performance across all stages of business cycle and it also performs best among all stock sectors in recovery stage. Tourism and Leisure sector performs best in the aspect of risk-adjusted return in expansion stage. Healthcare services is outstanding among other sectors in recession stage. In depression stage, most of stock sectors have negative average return where commerce and ICT are only two sectors with positive risk-adjusted return in this stage of business cycle.
In addition, this study also provides insight towards impact of key macroeconomic factors, business sentiment index and fund flow on sectoral stock returns. With sectoral approach, this study contributes to many controversial points regarding relationship of key macroeconomic factors on stock returns where conflicting results were found in the literatures where most of the studies were focusing on market level. This study also explore the relationship between expected business sentiment index in the different stages of business cycle on sectoral stock returns and found that expected business sentiment index has most influence on sectoral stock returns in depression stage of the business cycle.
Finally, the study analyzes relationship between net investment of different types of investors and sectoral stock returns which reveals that market return in expansion stage has significant causal relationship with net investment from domestic institutions and market return in recession stage also has significant causal relationship with net foreign investment while there is no significant causal relationship between net investment from any type of investors on sectoral stock returns. This imply direction of causal relationship between fund flow and stock market return is more likely to be market return attracts fund flow rather than fund flow impact on stock market return.
This study contributes to the practical methodology of business cycle stage determination, investment recommendations based on risk-adjusted returns of stock sectors along different stages of business cycle, and additional insights on the influence of key macroeconomic factors and business sentiment on stock sector returns and relationship between fund flow from different types of investors and stock returns in both market and sector levels.
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Thesis (Ph.D. (Economics))--National Institute of Development Administration, 2020