Do Industries Lead the Stock Market in Australia? An Examination of the Gradual Information Diffusion Hypothesis

Using the monthly data for more than 1700 Australian stocks over the period from 1990 to 2009, we extend the work of Hong et al (JFE, 2007) to investigate whether industry portfolio excess returns predict the aggregate market. We find that a few industries, such as General Retailers, Industrial Engineering and Oil Equipment & Services, significantly lead the market even controlling for well-recognized market predictors. However, we do not find that the ability of an industry to predict the market is closely related to its capacity to forecast economic growth as documented by Hong et al (2007) for the U.S. markets. Instead, we find that the ability of an industry to lead the market is significantly moderated by proxies for investor recognition, providing evidence in support of the gradual-information-diffusion hypothesis. We also find that the predictive power of industry portfolio returns is weaker during periods of economic recession