Download - Value investing in emerging markets
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 1/98
1
Value Investing in the
Emerging Markets
Master thesis
Marjo‐Riitta
Elisa
Pitkänen
Copenhagen Business School Finance and Strategic Management Supervisor: Ole Risager December 2011 Pages: 80, Characters: 139,548
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 2/98
2
Acknowledgments
Writing this master thesis has been an especially interesting journey into the fields of value
investing, different schools of thought within finance, as well as the emerging markets. It has
also nicely brought my academic journey from Psychology studies in the UK to Finance and
Strategic Management at Copenhagen Business School to an end; As well as helped in giving
direction for a future career in the field of asset management.
I would like to thank Ole Risager for his knowledgeable guidance and ideas and my family
for support and patience. It would not have been possible to write this thesis without such
guidance and support for which I am very thankful.
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 3/98
3
Executive Summary
First introduced in 1934 by Benjamin Graham and David Dodd, value investing involves
purchasing securities that are undervalued by the markets when compared with the security’s
intrinsic value. It thus involves quite a bit of quantitative and qualitative research on the part
of an investor and once a stock qualifies as an investment target, it is held for long periods of
time. Value stocks are generally defined as companies with low market-to-book, price-to-cash
or price-to-earnings ratios or a high dividend yield. Value companies are those without
significant technology, operating in mature and low growth industries.
Emerging markets have become popular investment targets due to their high GDP growth
prospects, relatively low indebtedness and interesting structural and demographic changes
among other such trends. High GDP growth, however, does not necessarily imply higher
equity returns as argued by Dimson, Marsh and Staunton (2010). As seen in this paper, value
investing is especially interesting also in the emerging markets and addressed by the main
research question: Is there a value premium in the emerging markets from 2001 to 2011?
There is a great deal of international evidence for a value premium. From US evidence by
Davis, Fama and French (2000) of 5.5 percent per year between 1929 and 1997, to emerging
markets evidence by Rouwenhorst (1999) of 9 percent per year between 1982 and 1997.
While there is great agreement on the existence of a value premium, there is less agreement as
to why it exists. Two schools of thought; traditional finance and behavioural finance, disagree
on the explanation. Traditional finance argues that markets are efficient, risk and return go
hand-in-hand and a value premium arises because value stocks are riskier than growth stocks.
Whereas behavioural finance argues that markets are not rational and mispricing occurs due to
various behavioural factors and human cognitive biases, which give rise to a value premium.
In this study, a value premium in selected emerging markets between 2001 and 2011 is found.
The value premiums with the market-to-book ratio and 50, 30 and 10 percent portfolios are
7.345, 10.315 and 141.854 percent. With price-to-cash as a sorting percentage, the value
premiums are 9.330, 13.549 and 46.707 percent. It is also found that the standard deviation
and beta of the value portfolios are higher than those of growth. And that value investing is a
safer strategy in downmarkets with lower correlations among country returns than those found
with the growth strategy.
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 4/98
4
When discussing these results, traditional finance view that value stocks are more risky is
looked into first. Standard risk measures are criticised as standard deviation does not
differentiate between upside and downside risk, and beta is easy to use in theory, but does not
adequately explain risk of stocks in practise. Downmarket correlation is an interesting risk
measure and other downside risk measures for emerging market returns are called for.
Further, an analysis of the performance of emerging market value and growth strategies in
different economic states would be interesting. Nevertheless, it is concluded that behavioural
finance with their limits to arbitrage, framing and prospect theory explanations seem more
applicable in explaining value premiums. Broadly speaking, these theories look at mispricing
in the markets as arising from human cognitive biases that influence decision making
In the perspectives chapter, the real life growth and changes in the emerging markets will be
looked at with an eye on where value and profit opportunities exist. The major trends taking
place in the emerging markets are highlighted with some examples. Where value could
currently be found in the emerging markets is a question that is addressed with a look on
which countries and equity markets could be benefiting from the current growth in especially
Asia with the driving force of China: And the focus is on Chile.
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 5/98
5
Table of Contents
Acknowledgments ...................................................................................................................... 2
Executive Summary ................................................................................................................... 3
Chapter 1: Introduction .............................................................................................................. 7
Research question
.......................................................................................................................
8
Sub‐questions .............................................................................................................................. 8
Structure ...................................................................................................................................... 9
Chapter 2: Value investing as an investment approach and evidence for value premium ....... 10
Value investing as an investment approach ............................................................................ 10
The main developed markets evidence for the value premium .............................................. 11
The main emerging markets evidence for the value premium .............................................. 13
Chapter 3: The Emerging Markets ........................................................................................... 14
How to define the emerging markets....................................................................................... 14
The increasing importance of the emerging markets ............................................................. 14
GDP growth does not imply superior returns ......................................................................... 16
Indebtedness of nations and performance in downturns ....................................................... 19
Chapter 4: Theoretical background .......................................................................................... 21
Traditional finance ............................................................................................................... 21
Efficient‐market hypothesis ...................................................................................................... 21
Random Walk
............................................................................................................................
22
Investor rationality .................................................................................................................... 22
Expected Utility Theory ............................................................................................................ 22
Capital asset pricing model (CAPM) ........................................................................................ 23
Challenging the EMH ‐ Perfect information ........................................................................... 23
Challenging the EMH ‐ Investor rationality ........................................................................... 24
Behavioural finance .............................................................................................................. 24
Psychology and limits to arbitrage .......................................................................................... 24
Mental accounting ..................................................................................................................... 25
Myopic loss aversion ................................................................................................................. 25
Framing ..................................................................................................................................... 26
Prospect Theory ........................................................................................................................ 26
Chapter 5: Empirical Research ................................................................................................. 29
Method ..................................................................................................................................... 29
Data and sources ................................................................................................................... 29
Emerging markets
.....................................................................................................................
29
Data provider ............................................................................................................................ 29
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 6/98
6
Time period ............................................................................................................................... 30
Return index .............................................................................................................................. 30
Portfolio construction ........................................................................................................... 30
Variables .................................................................................................................................... 30
Sorting percentages
...................................................................................................................
31
Returns and moments ........................................................................................................... 31
Defining the returns .................................................................................................................. 31
Variance ...................................................................................................................................... 32
Skewness .................................................................................................................................... 32
Kurtosis ....................................................................................................................................... 33
Portfolio risk ......................................................................................................................... 33
Standard Deviation .................................................................................................................... 33
Beta ............................................................................................................................................. 33
Correlations ............................................................................................................................... 34
Results ...................................................................................................................................... 35
Emerging market returns and moments .................................................................................. 35
Value premiums ......................................................................................................................... 37
Measures of risk ................................................................................................................... 45
Standard deviation ................................................................................................................... 45
Beta ............................................................................................................................................
46
Correlation ................................................................................................................................ 47
Chapter 6: Discussion ............................................................................................................... 52
Answering the research questions ........................................................................................ 52
Traditional finance explanation ............................................................................................ 54
Standard deviation ................................................................................................................... 54
Beta ............................................................................................................................................ 59
Correlation
................................................................................................................................
60
Behavioural finance explanation .......................................................................................... 61
Investor rationality .................................................................................................................... 61
A deeper look on risk ............................................................................................................... 62
Chapter 7: Perspectives ............................................................................................................ 66
Can the emerging markets drive the global economy out of doom? .................................... 66
Where in the emerging markets can value be currently found? ........................................... 69
Conclusion ................................................................................................................................ 73
References ................................................................................................................................ 76
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 7/98
7
Chapter 1: Introduction
Value investing is an investment paradigm first introduced by Benjamin Graham and David
Dodd in 1934 and has by now become a broadly accepted approach. In the style of Graham
and Dodd, value investors recognise that a company has two prices, a price at which a
company is trading on the markets and the company’s intrinsic value. These investors then try
to find companies that are trading below their intrinsic value on the markets and purchase
these companies for the long-term. The existence of a value premium is a widely reported
phenomenon with studies ranging from the developed markets since the 1930s to today, as
well as more recent studies in the emerging markets.
When looking at the emerging markets, they have become popular investment targets due to
their high GDP growth prospects, which are expected to translate into superior investment
results. Among others, Dimson, Marsh & Staunton (2010), however, find no connection
between a country’s GDP growth and investment results when they research 83 countries
between 1972 and 2009. In fact, countries with the lowest GDP growth have the highest
returns. This makes us question the idea of investing into the emerging markets with the
motivation of high returns due to growth, and turns heads towards other investment
approaches, such as value investing. Emerging markets also have high volatilities and risks.
From a value investors’ point-of-view, it can be even easier to find undervalued stocks in
more volatile markets. Value investing can be a ‘safe’ approach in such markets as investors
take care not to pay too high a price for a stock, thus mitigating downside risk.
Theoretically speaking, the existence of a value premium across markets goes against the
efficient-market hypothesis assumed by traditional finance. At least if the premium cannot be
explained with the notion that value stocks are riskier than growth stocks: An explanation that
seems to lack substantial evidence. Behavioural finance, on the other hand, explains the value
premium with limitations in human cognitive ability and irrationalities and biases in
behaviour that result in mispricing on the markets that do not immediately correct themselves.
Increasing interest in behavioural finance type of thinking resulting in contrarian investment
approaches, combined with the increasing importance of the emerging markets, this thesis
will investigate these topics and attempt to answer the following research question and sub-
questions.
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 8/98
8
Research question
Is there a value premium in the emerging markets between 2001 and 2011?
Sub‐questions
1. Does deep value investing in the emerging markets generate an even higher value
premium?
2. Are emerging market value stocks more risky than growth stocks when measured in
traditional risk measures beta and standard deviation?
3. What are the correlations between selected emerging market country returns for value
and growth portfolios in downmarkets?
4. Can the value premium be better explained with traditional finance theory or
behavioural finance?
5. Where can value be currently found in the emerging markets?
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 9/98
9
Structure
1) This paper begins with a brief introduction, which highlights the research question and sub-
questions. 2) A deeper look into value investing as an investment approach is next and
followed by an overview of the evidence for a value premium in developed and emerging
markets. 3) The emerging markets will then be defined and their growth and importance
highlighted, as well as the argument that high GDP growth does not necessarily imply higher
returns. 4) A theory section will outline the approaches of traditional finance and behavioural
finance in detail. 5) After which the empirical research begins: Method of the quantitative
study includes explanations for data and sources, portfolio construction, returns and moments
and portfolio risk. The results section highlights descriptive statistics of the emerging markets
returns, the value premiums found, and the risk measures of standard deviation, beta and
downmarket correlation. 6) In the discussion, the value premiums are explained with
traditional and behavioural finance approaches. 7) And last, in order to add perspective, the
trends taking place in the emerging markets are looked at in more detail and where value can
currently be found in the emerging markets.
1. Introduction
3. Emerging markets
5. Empirical research
4. Theory
6. Discussion
7. Perspectives
2. Value investing
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 10/98
10
Chapter 2: Value investing as an investment approach and evidence
for value premium
Value investing as an investment approach
Value investing as an investment paradigm was first introduced by Benjamin Graham andDavid Dodd at Columbia Business School in 1928. A pioneering text by these authors called
Security Analysis was published in 1934. Generally, value investing involves buying
securities that are underpriced by the market when compared with what is sometimes called
an intrinsic value of the security, which an investor derives through some form of
fundamental analysis. In the view of Graham and Dodd (1934), equity prices include a
rational component reflecting the fundamentals of a company and an irrational component
capturing the emotions and psychology of investors at large. The rational component can be
estimated with careful analysis, but the irrational component varies a great deal, and hence so
do equity prices. They recommend buying a stock when it is underpriced by the market and
then holding it for long time periods, thus creating a margin of safety against losses.
Intelligent Investor by Benjamin Graham (1949), a book that made value investing accessible
to the individual investor, includes the following piece of advice: “If you speculate, you will
(most probably) lose your money in the end. Buy when most people are pessimistic and sell
when they are actively optimistic. Investigate, then invest. Rely on the time-tested principle of
insurance, with wide diversification of risk.” (Graham, 1949, p. 3) The relevance of this
statement remains, because even though markets have changed, human nature and investment
behaviour is likely to have remained much the same.
Value stocks are usually defined as companies that have low market-to-book ratio (M/B),
price-to-cash ratio (P/C) or price-earnings ratio (P/E), or a high dividend yield. Value
companies are often mature companies with not such high growth prospects. In fact, low sales
growth is sometimes also used as a criterion to define value companies. Some may even call
these companies dull and boring, as they are usually not the ones with the newest technologies
and most exciting businesses. Examples of value companies from the Russell 1000 value
index in the US include Johnson & Johnson, AT&T, Procter & Gamble and JP Morgan
Chase. Growth stocks are usually of companies that are expected to grow at a rate that is
higher than average, often having high P/C, B/M and P/E ratios and low dividend yields.
These companies are the ones that appear a lot in the news with their newest technologies and
exciting businesses models. Examples of growth companies in the Russell 1000 growth index
in the US include Apple, Google, Wal Mart and Pepsico. (Risager, 2009)
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 11/98
11
There is a great deal of international evidence showing that over long time periods, value
stocks produce higher returns than growth stocks. So much so that it is almost a universally
agreed upon fact that there exists a value premium in stock returns. Among others, Basu
(1977) finds that value portfolios generate higher returns than growth portfolios. Fama and
French (1992) also find a value premium after controlling for market risk and size.
Lakonishok, Shleifer and Vishny (1994) find that searching for deep value can also pay off.
The value premium evidence is especially strong for the United States (US), but also other
countries, such as the United Kingdom (UK), Japan, other European countries as well as the
Emerging Markets. This evidence for the developed markets will be looked at next and the
evidence for the emerging markets right after.
The main
developed
markets
evidence
fo r
the
value
premium
Perhaps the most prominent US evidence for the value premium comes from Davis, Fama and
French (2000) over the period 1929-1997 and including basically all industrial companies on
the New York Stock Exchange and later AMEX and Nasdaq. The stocks are sorted according
to their market-to-book (M/B) ratio with the 30 percent highest ratio stocks as the growth
portfolio and the 30 percent lowest as the value portfolio. The average value premium found
is 0.46 percent per month, or 5.5 percent per year and it is statistically highly significant.
Lakonishok, Shleifer and Vishny (1994) find that it is even more profitable to search for deep
value by showing that the stocks with the 10 percent lowest M/B and P/C ratios have
significantly higher returns than the 30 percent lowest B/M stocks. Furthermore, they show
that it is beneficial to sort stocks according to more than one criterion, such as low M/B ratios
and low sales growth, with an average return as high as 22.1 for the value portfolio versus
11.4 percent for growth in the period 1963 to 1990.
Dimson, Nagel and Quigley (2003) provide evidence for a UK value premium from 1955 to
2001. Stocks are classified according to M/B ratios and size (Fama & French methodology).
They find a monthly value premium for small cap stocks of 0.48 and for large cap stocks of
0.50, similar to Fama and French findings for the US. Dimson et al. (2003) find a significant
value premium when sorting stocks according to their dividend yields (D/P), although not as
high as that with the M/B classification.
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 12/98
12
Chan, Hamao and Lakonishok (1991) demonstrate a value premium for the Japanese markets
over the period 1971 to 1988 using a large sample of firms listed on the Tokyo Stock
Exchange. It is found regardless of whether stocks are sorted according to their M/B ratios,
earnings yields (E/P) or P/C. However, the highest and most significant value premium is
found using the M/B ratio and P/C. Cai (1997) sorts stocks according to M/B and P/C ratios
and uses data between 1971 and 1993. A significant value premium is found regardless of the
sorting method, although again, the M/B ratio produces the highest value premium. The
average annual M/B premium is 11.3 percent. Whereas, the average annual P/C premium is 6
percent. In the Japanese market, the earnings yield does not have much predictive power,
which is due to the fact that earnings figures are often distorted in Japan for various tax
reasons. Cash-flow yields are a better measure in this market as they are less difficult to
manipulate.
The value premium exists also for other developed countries, although it is not as statistically
significant as that of the US, UK and Japan, most likely because of the small sample sizes.
The most comprehensive international study is that of Fama and French (1998) within a time-
frame of 1975-1995 and with MSCI data. A value premium is found in all countries: United
States, Japan, United Kingdom, France, Germany, Italy, the Netherlands, Belgium,
Switzerland, Sweden, Australia, Hong Kong and Singapore. The global portfolio has a value premium that is statistically significant, whereas the individual countries have positive value
premiums, but they are not statistically significant except that of France. This is most likely
due to small sample sizes. France has a premium exceeding 6.5 percent per year. The value
premium for Italy is only positive when stocks are sorted according to C/P and other studies
have also found that value investing does not necessarily work in Italy. Consistent with the
US findings, the most suitable sorting variables are B/M and C/P.
Bird & Whitaker (2003) study the value premium in France, Germany, Italy, Spain, the
Netherlands and Switzerland between 1990 and 2002, which is a time-period when value
strategies did not perform very well. They use B/M as a sorting variable. The value premium
exists in all markets, but is significant only in France (5.5 percent) and Switzerland (7.5
percent), again most likely due to small sample sizes. The authors find that it is less than 50
percent of the value stocks that did very well, which implies that it could be beneficial to use
multiple sorting variables as in the studies for the US. Risager (2009) studies the value
premium on the Danish market over a long time period of 1950-2008 using the P/E ratio as a
sorting variable and a 20 stock sample. The 10 stocks with the lowest P/E ratios are the value
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 13/98
13
portfolio and the 10 stocks with the highest P/E ratio are the growth stocks. With value
weighted portfolios, the value premium equals 4.3 percent and with equal weighting, it equals
6.3 percent. These results are statistically significant.
The main
emerging
markets
evidence
for
the
value
premium
In their international research on the value premium outlined above, Fama and French (1998)
also study the emerging markets between 1987 and 1995. The emerging market returns are
higher than those of the developed world, with an average annual excess return for the equal-
weight index of 24.47 percent and for the value-weight of 25.93 percent. When portfolios are
formed using B/M, E/P and size as the sorting factors, a value premium is found in emerging
market returns. The annual difference between high and low B/M portfolios is 16.91 percent
for value-weighted and 14.13 for equal-weighted portfolios. The value premium using E/P is
4.04 (for value-weighted) and 10.43 (for equal-weight). The returns are leptokurtic and
skewed to the right, making the statistical inference a bit questionable.
Rouwenhorst (1999) sorting stocks according to their B/M ratio finds a monthly premium of
0.72 if stocks are weighted equally and 0.98 if countries are weighted equally for a portfolio
of 20 emerging markets between 1982 and 1997. This translates to an annual equally
weighted value premium of 9.00 percent. Drew & Veeraraghavan (2002) find a value
premium in Malaysia. They report that small and high book-to-market equity (BE/ME) stocks
produce higher returns than big and low BE/ME equity stocks. Using “high minus low” and
“small minus big” strategies, the respective annual returns are 17.70 percent and 17.69
percent, while the annual market return is 1.92. Joshipura (2010), in a study between 1995 and
2008, finds a significant abnormal return over a three-year period for the contrarian strategy in
the Indian market. The methodology determines winner and loser stocks by past abnormal
returns over a 36-month period, followed by a three year testing period. They also show that
these profits are not a compensation for higher risk. Their results are consistent with those of
Jegadeesh and Titman (1993). Further, Hameed and Ting (2000) finds that there seems to be
evidence for markets overreacting and thus for the existence of contrarian profits in Malaysia
and Kang (2002) finds a short term premium for contrarian investing in the Chinese stock
market (2002).
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 14/98
14
Chapter 3: The Emerging Markets
How to define the emerging markets
Generally, the criteria used to define whether a country is an emerging market or not include
the size and openness of its economy, income per capita, the state at which its integration
within the global marketplace is and its political, legal and financial institutions with their
strength (Marr and Reynard, 2009). Listing the emerging markets countries is not as simple as
it seems, as even the major stock market index providers do not agree on a listing. There are,
however, 19 common countries that the Financial Times Stock Exchange (FTSE), Morgan
Stanley Composite Index (MSCI) and Standard & Poor (S&P) list as emerging markets and
they are the following: China, India, Indonesia, Malaysia, Philippines, Taiwan, Thailand,
Czech Republic, Hungary, Poland, Russia, Turkey, Brazil, Chile, Mexico, Peru, Egypt,Morocco, South Africa. The emerging markets are generally split into four regions (in
brackets the representative countries for each region): Asia (China, India, Indonesia,
Malaysia, Philippines, Taiwan, Thailand), Europe (Czech Republic, Hungary, Poland, Russia,
Turkey), Latin America (Brazil, Chile, Mexico, Peru) and Africa and Middle East (Egypt,
Morocco, South Africa).
The increasing importance of the emerging markets
Whichever way they are defined, it is undeniable that the importance of the emerging markets
is remarkable and increasing every moment. Already currently, four fifths of the world’s
entire population is in the emerging markets (five times the number of developed markets)
and approximately three-quarters of the lands are covered by these countries (two times that
of developed markets) (Dimson et al., 2010) Around half of the world’s GDP, close to half of
the world’s exports as well as energy consumption comes from these economies. (Marr &
Reynard, 2009)
The GDP growth of the emerging markets as a whole has also been significantly faster than
that of the developed world recently. Figure 1 below depicts a PricewaterhouseCoopers
provided view of world GDP growth projections written by Hawksworth and Cookson and
based on latest available data. It shows that the emerging markets, led by the BRICs, are
likely to continue growing fast. In fact, the E7 economies (meaning the seven largest
emerging market’s economies) will be 50 percent larger than the G7 economies by 2050.
China will outpace the US as the leading world economy already around 2020 and India will
follow suit by 2050. Brazil and Russia will reach just below US by 2050. These trends will
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 15/98
15
decrease the relative importance of leading developed nations like the US, Japan and
Germany. One must note, however, that these are projections and unexpected events result in
growth patterns that are not fully predictable. The world is nevertheless changing at a
remarkable speed. (Dimson et al., 2010)
Figure 1: Developed and emerging market GDP growth 1950-2050
Source: Dimson et al., 2010
The reasons for high growth of emerging markets include relatively low indebtedness, high
possible productivity, strengthening in domestic demand and consumption, good
demographics and richness in commodities in many emerging countries. Government policies
are expansionary and firms have substantial cash resources. Consumer sentiment is alsoimproving, all of which supports this growth. (Herrmann, Wassermann and Von
Liechtenstein, 2011)
Growth in the different emerging market regions since February 1995 until February 2011 is
shown in figure 2 below. It is clear that Asia has become the most growing part of Asia,
especially in the past ten years, followed by relatively stable performance of Middle East &
Africa, CEE and Russia and Latin America. As a result, Asia also did not suffer to such a
great extent in the previous economic crisis, as seen in the figure below.
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 16/98
16
Figure 2: Emerging markets regional performance comparison
Source: Emerging Markets – a differentiated view, Global Economic Research, 2011
GDP growth does not imply superior returns
A typical reason to invest in the emerging markets is the high economic growth prospects that
these countries promise as opposed to the developed world when measured by GDP growth. It
thus becomes very interesting and relevant to firstly question how strong the link between
GDP growth and returns on the equity markets actually is. Research shows it is much weaker
than many think, in fact there seems to be no positive link between a country’s GDP growth
and stock market returns. For instance, Dimson et al. (2010) find no connection between a
country’s GDP growth and investment results when they research 83 countries between 1972
and 2009. In fact, countries with the lowest GDP growth have the highest returns. The
Chinese equity market serves as an example about the difficulties of investing into the
emerging markets for growth prospects. Although investors have seen the Chinese economy
grows rapidly over the past decade or so, its equity markets have not developed very much.
What this shows is that GDP growth does not automatically imply profitable companies and
shareholder returns. It is important to remember that no matter where one is investing
geographically, what one is essentially investing in, is companies’ profitability, cash flows
and their return on equity or assets. A good example of this is Latin America: A region that
despite significantly lower GDP rates has outperformed emerging Asia, because the
profitability of companies in Latin America has been higher (Marr & Reynard, 2009).
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 17/98
17
Secondly, it should be realised that markets anticipate economic growth, just as they
anticipate growth in returns in the case of growth companies. Thus this growth is often priced
into securities. Historically, a strategy of investing into countries with high anticipated
economic growth rates has underperformed a similar strategy of investing into countries with
lower economic growth rates. In the same fashion as growth stocks are often overpriced
compared to their relatively cheaper companions in the value family that could have higher
upward potential, thus translating into higher potential for future profits. (Dimson et al., 2010)
Let us next look into what kinds of stock returns the emerging and developed stock markets
have provided over the past 25 years. As seen in figure 3, equity investors investing in
developed markets have had a difficult time in the 2000s with annual returns close to zero as
shown by the MSCI world index. The emerging markets on the other hand have returned
close to 10 percent annually during the same time. When comparing emerging market returns
with the returns of the developed markets, it becomes clear to see why these markets have
gained so much attention in especially recent times. Looking at figure 3, the only period when
the MSCI world index outperformed the Emerging market index by a significant amount is
the 1980s with a return of 20 percent and outperformance of about 8 percent. In 1976-79 both
returned similar amounts and same goes for the 1990s, with a slight outperformance of the
MSCI world index. And as already mentioned; in the 2000s, the emerging markets returnedabout 10 percent, while the world index returned strikingly low returns of close to zero
percent. The trend for the MSCI world index returns is first an increase from 1976-79 to the
1980s and ever since a clear declining returns pattern until today’s near zero returns. While
relatively stable returns of around 10 percent persist for the emerging markets index over the
entire 25 year period.
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 18/98
18
Figure 3: Emerging and developed market risk and return between 1976 and 2009
Source: Dimson et al., 2009
When looking at risk, some argue that the gap between the developed and emerging markets
is getting narrower. The current sovereign debt crisis in the European Union and the
continuing instability and risk of a double dip and recession in the US are real concerns. Let
us look at the historical standard deviations. As seen in figure 3 above, it is clear that the
emerging markets are more volatile compared with the MSCI world index throughout the 25
years. For both the MSCI world index and emerging markets index, the standard deviations in
the 2000s are about 5 percent higher than they were in the 1970s. It is also worth a mention
that the standard deviations of individual emerging markets shown by the light blue bars are
significantly higher than those of a diversified portfolio of these markets shown by the gray
bars. But even a diversified portfolio of emerging markets is riskier than the MSCI world
index. While the returns of the MSCI world index are on a decreasing trend over time, the
volatilities of these markets have increased. For the emerging markets, increased volatility has
been coupled with relatively stable returns that are highly positive also in the 2000s.
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 19/98
19
Indebtedness of nations and per formance in downturns
What is also relevant to risk is the indebtedness of nations. Government debt as a percentage
of GDP in emerging markets as a broad categorisation is overall quite significantly lower than
debt in developed markets. According to IMF estimates, the debt-to-GDP ratio of emerging
market governments fell by 0.2 percent between 2007 and 2010, whereas the same number for
the developed markets increased by 26 percent. As seen in figure 4, this development is likely
to continue between 2010 and 2015 as well. Some of this difference is due to favourable
demographic trends, such as the rapidly increasing middle-class population, but government
policy in times of crisis cannot be ignored. Including tighter fiscal and monetary policy to
build-up of foreign reserves, as well as strenuous capital requirements and lending limits to
banks in the case of emerging markets. (Country Indebtedness An Update, 2011) With this in
mind, it seems that the emerging markets will keep growing and nevertheless still keep their
balance sheets relatively healthy. This is very relevant today as we are living in the midst of a
developed world sovereign debt crisis where government debt seems to be packaged again
and again, as well as moved around, but no long-term solution is in sight.
Figure 4: Change in ratio of government debt to GDP for the G20
Source: Country Indebtedness An Update, 2011
In order to further highlight the relevance of the risk issue between developed and emerging
markets, let us look into how equities in these markets have performed during downturns.
What we see is that even though in the past, the emerging markets have performed relatively
worse compared to the developed markets in downturns, that does not seem to be the case to
the same extent with the recent crisis. Figure 5 below shows the performance of developed
and emerging markets equities during downturns between 1990 and 2011. In the past, the
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 20/98
20
emerging markets have consistently shown worse performance during downturns, implying
that these markets are highly volatile and risky especially during recessions. It is interesting to
observe, however, how in the recent downturn between May 2011 and August 2011, the
returns of the developed and emerging markets are very close to each other with developed
market outperformance of only 1.2 percent. Whether this is a persisting trend or not, time will
tell, and it is probably too early to say. Nonetheless, it is definitely one to keep an eye on. In
chapter 7 on pages 66-69 we will further look at how the emerging markets are in fact
becoming quite independent of the developed world at least in some ways, which could be a
factor playing its part also here.
Figure 5: Performance of developed and emerging market equities during downturns between
August 1990 and August 2011
Source: The Way Forward: Measuring the Impact of Short-Term and Structural Growth
Drivers on Emerging Market Investing, 2011
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 21/98
21
Chapter 4: Theoretical background
While there is broad agreement on the existence of a value premium, there is much less
agreement on why it exists. Is it a market anomaly or can it be explained by showing that
value stocks are riskier than growth stocks? Two schools of thought, Traditional finance and
Behavioural finance, have different explanations for the value premium.
Traditional finance with their Efficient-market hypothesis (EMH) believes that investors are
rational, markets are efficient and follow a random walk, and risk and return go hand-in-hand.
Expected utility theory explains how individuals act in ways that maximise their expected
utility when faced with a risky situation. The capital asset pricing model, on the other hand, is
a model that explains asset returns and risk. As any theoretical explanations, however, these
do somewhat lack explanatory power in the real world.
Behavioural finance takes into account the influence of human psychology on financial
decision making. It attempts to patch the shortcomings of the EMH and find more accurate
ways to explain investor behaviour and thus find an approach that has more explanatory
power in real life. It disregards the assumption of the EMH that human beings are rational and
rather investigates the key role that psychology and emotions play in financial decision
making. Financial markets are not expected to be efficient; in fact according to behavioural
finance, market efficiency arises only rarely. In the following, these two schools of thought
and their main assumptions will be presented.
Traditional finance
Efficient‐market hypothesis
According to the Efficient-market Hypothesis (EMH), financial markets are informationally
efficient, meaning that all publicly available information is fully reflected in stock prices,
which always reflect the fundamental value of a company. This implies that it is not possible
to consistently make returns that are above the average market returns, because all
information is publicly available at the time an investment is made. There is no investment
strategy based on publicly available information that could generate excess market returns.
There are three forms of the EMH where assumptions are more relaxed, the weaker the form.
These are the weak, semi-strong and strong forms of EMH. (Brealey, Myers & Allen, 2008)According to the EMH (especially the stronger forms), the best strategy would be to simply
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 22/98
22
invest in the market portfolio as active portfolio management would not generate superior
returns (Shleifer, 2000). The EMH assumes that there is no systematic pattern in the asset
prices, as this could be taken advantage of by active money managers, implying that stock
markets follow a random walk, outlined in the following.
Random Walk
The idea that stock market prices move according to a random walk process and thus cannot
be predicted, can be traced back to a French broker Jules Regnault in 1863. It was also
discovered by Kendall in 1953 and written about by Fama in 1965. What is broadly meant by
the random walk hypothesis is that price movements are independent of one another. To
illustrate how, consider a game of tossing a coin, where each outcome is independent of the
other outcomes and then plotting these outcomes into a graph that ends up looking like the
stock market.
Investor rationality
The theoretical foundations of the EMH rely on assumptions of human behaviour. Investors
are assumed to be rational and thus naturally also value securities rationally for their
fundamental value (using the discounted cash flow method, in brief DCF). When new
information is revealed, the prices are immediately bid up or down, almost automatically.
Where investors are not rational does not matter, because their trades are relatively few and
random and cancel each other out thus not affecting overall price levels. Where investors are
irrational in ways that are similar also does not matter as rational arbitrageurs will eliminate
the influence of irrational investors on prices. (Shleifer, 2000)
Expected Utility Theory
The Expected Utility (EUT) theory was first initiated by Daniel Bernoulli in 1978 and states
generally that when individuals are faced with a risky choice, they will make a decision that
maximises their expected utility. Hence decision making is based on the expected utilities of
risky prospects. Expected utility means the expected use of wealth rather than the actual
value. In an equation, the weighted sums of the utilities of outcomes are multiplied by the
probabilities of these outcomes, then ranked and the ones with the highest expected utility will
be chosen. Furthermore, most individuals are risk averse and thus have a concave utility
function, see figure 6 below. The EUT and risk aversion are commonly accepted principles in
traditional finance and can be used to predict decisions under risk. However, psychological
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 23/98
23
factors challenge the EUT. For challenges relating to the EUT, see the part on Prospect
Theory on pages 26-28.
Figure 6: Expected Utility FunctionSource: Own creation
Capital asset pri cing model (CAPM)
In traditional finance, a widely used model to for example estimate cost of capital for firms is
the Capital Asset Pricing Model (CAPM) by William Sharpe (1964) and John Lintner (1965).
In this model, risk is shown by the beta ( β ) of a security. According to the CAPM, all
variation in β is compensated in returns and thus risk and return always go hand-in-hand.
Unfortunately, the empirical evidence for using the CAPM to measure risk and the relation
between risk and return is poor. So much so that it invalidates its wide use in this context. For
example, Fama & French (2006) find that even though the CAPM is sufficient in explaining
the value premiums from 1926 to 1963, it cannot explain the premiums of a more recent
period from 1963 to 2004. In the more recent period, growth stocks seem to have larger β s
than value stocks, and yet value stocks outperform growth stocks. Thus, although CAPM is
widely regarded as a useful model, one could argue that its risk measure β does not help inexplaining the value premium in the real world to the extent that would encourage as wide a
use as the model currently has.
Challenging the EMH ‐ Perfect information
The assumption of perfect information has been challenged with findings that show that all
information is not reflected in stock prices immediately, like EMH assumes. Some important
information may never be public and investors tend to invest when the market is going up and
sell when it is going down, thus engaging in herd behaviour. (Wärneryd, 2001) There have
Utility
Wealth
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 24/98
24
been tests of the weak, semi-strong and strong forms of the EMH. The strong and semi-strong
forms have been shown not to hold in practice and even the weak form has been challenged.
In most cases, it is the weak form if any that may hold. Also, in real life, investors rarely
follow the passive investment strategies recommended by the EMH (Shleifer, 2000).
Challenging the EMH ‐ Investor rationality
It is difficult to prove that investors are rational. As simple as this assumption seems, it is
unlikely to be reality. Black (1986) argued that investors trade on noise, rather than
information. Common mistakes include trading too much, blindly following the advice of
financial gurus, failing to diversify, selling winning stocks and holding too long onto losing
ones, buying actively managed expensive mutual funds and following stock patterns and
models. (Black, 1986: cited in Shleifer 2000)
In behavioural finance, the assumption of investor rationality is relaxed and investor
behaviour is rather looked at through psychological explanations. For example, when
assessing situations that involve risk, investors do not assess the possible final wealth, but
gains and losses relative to a reference point. They also try to avoid losses, called loss
aversion, resulting in a loss function that is steeper than that of gains. Kahneman and Tversky
(1979) model this behaviour as the Prospect Theory, discussed on pages 26-28. In finance,
irrational thinking and behaviour of investors leads to phenomena such as an aversion to
holding stocks, called the equity premium puzzle and the reluctance to sell stocks that lose
value and thus realise that a particular investment was a bad one.
Behavioural finance
Psychology and limits to arbitrage
Arbitrage refers to a situation where there is a mispricing in the market that is quickly
corrected by rational investors gaining from this situation and thus correcting the market.
Barbaris & Thaler (2002) argue that there are limits to such arbitrage corrections as often
times corrective moves would be costly and risky to these rational investors and thus are not
carried out to the extent and at the speed assumed by the school of Traditional finance. The
limits to arbitrage include the risk that markets may not correct themselves after the rational
investor has attempted to go in with a corrective more, but actually get further mispriced. Thisis called the Noise Trader Risk and was introduced by De Long et al. in 1990 and results
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 25/98
25
when irrational investors trading behaviour keeps moving an already mispriced security in the
same direction, despite the moves of some rational investors. Furthermore, transaction costs
present in the market limit arbitrage possibilities and make correction attempts costly on top
of their riskiness, thus limiting this type of behaviour further.
Mental accounting
Mental accounting involves a process by which individuals use cognitive operations to
organise, evaluate and keep track of their financial activities. It helps understand the
psychology of decision making, because mental accounting decisions affect perceived
attractiveness of choices. Mental accounting violates economic fungibility, meaning that
money placed in one mental account is not a perfect substitute for money placed in another account. Three components of mental accounting are the following. First, outcomes are
perceived and experienced. Then decisions are made and afterwards evaluated. Mental
accounting gives inputs for this ex ante and ex post decision making. Second, activities are
grouped into categories, including the sources (income, investments, pension etc.) and use of
funds (housing, food, spare time etc.). Third, the accounting activities are balanced either
daily, weekly, monthly or yearly, depending on the preferences of the person. (Thaler, 1999)
Myopic loss aversion
According to Kahneman, Tversky and Schwarz (1997), humans are more sensitive to
decreases in their wealth than they are to increases, as seen in the value function of the
Prospect Theory discussed later on (see figure 7). It has been empirically shown that losses
are valued approximately twice as heavily as gains (for example Kahneman and Tversky,
1992). Investors engage in mental accounting and when considering financial transactions, it
involves grouping of transactions either one at a time or in portfolios and the frequency withwhich these portfolios are evaluated. A myopic investor is defined as someone who tends to
make narrow framing of decisions and outcomes. In other words, make short-term rather than
long-term decisions and evaluate gains and losses frequently.
A real life example of this related to investing would be the following and the outcome would
depend on the time horizon of the investor. Think about two investors, one of them myopic,
and the other one not. The investment choices are stocks with returns of about 7 percent and
safe assets with a return of 1 percent. The myopic investor would check their gains and losses
in wealth more often and due to this be more likely to observe a loss. Since losses are more
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 26/98
26
painful, it is more likely that such an investor over time will invest in securities with lower
risk, such as bonds. The other one would check their wealth less often and thus be more likely
to invest in stocks with higher returns. (Kahneman, Wakker and Sarin, 1997) Later, mental
accounting and myopic loss aversion were incorporated into a theory called the Prospect
Theory, discussed later on.
Framing
The term “decision frame” used by Tversky and Kahneman (1981) refers to the acts,
outcomes and contingencies that a decision maker associates with some choice. This frame
depends on their norms, habits and personal characteristics as well as how the problem is
formulated. It is possible to formulate a decision problem in many different ways. Changingthe way in which a problem is framed can also result in changing preferences. Kahneman and
Tversky (1981) find that when a question is framed in different ways, choices that involve
gains are risk averse and choices that involve losses are risk taking. According to Kahneman
and Tversky (1981), “Individuals who face a decision problem and have a definite preference
(i) might have a different preference in a different framing of the same problem, (ii) are
normally unaware of alternative frames and of their potential effects on the relative
attractiveness of options, (iii) would wish their preferences to be independent of frame, but
(iv) are often uncertain how to resolve detected inconsistencies.” (Kahneman and Tversky,
1981, p. 457) In relating this to the Prospect Theory described next, the phase at which
framing occurs is the editing phase.
Prospect Theory
Developed by Kahneman and Tversky in 1979, Prospect Theory is an alternative theory to
analyse decision making in situations that involve risk. Traditional finance uses the ExpectedUtility Theory (EUT) to analyse decision making, but it is violated in situations that involve
risk. In risky situations irrational behaviour results in attitudes that differ from the EUT state.
In the following, the shortcomings of EUT will be briefly outlined and afterwards the main
aspects of Prospect Theory highlighted.
First, in EUT, utilities receive a weight according to their probabilities. In reality, however,
people tend to overweight possibilities that are certain as opposed to those that are only
possible. This is called the certainty effect and has been demonstrated in experimental tests by
Allais (1953). When respondents were for instance asked whether they would rather choose a)
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 27/98
27
4000 (units of money) with 80 percent certainty or b) 3000 (units of money) with certainty, 80
percent of respondents chose answer b. This finding cannot be explained by EUT.
Second, what happens when the choices become ones that involve possible losses? Here, a
phenomena called the reflection effect steps into the picture. This means that what was risk
aversion in the previous case becomes risk seeking when negative outcomes are possible. In
the example above, for instance, most respondents were willing to accept the risk of losing
4000 units with 80 percent certainty when presented with the option of losing 3000 for sure.
This, again, is not in alignment with EUT, as in this example the gamble is the choice with a
lower expected value, yet not widely selected. To sum up, certainty increases how desirable
gains are perceived and how aversive losses are perceived. In other words, respondents are far
more likely to choose sure gains and avoid sure losses than EUT would predict.
Third, in what is called the isolation effect, in situations that involve two isolated events,
choice is not determined only by probabilities of the final states. In fact, respondents often
ignore shared components and place much emphasis on components that distinguish the
alternatives from each other. For example, consider a situation where one may invest money
in a venture with a probability to lose what has been invested if the project fails. There is a
choice between a fixed return and a certain percentage of earnings in case of success. Eventhough the risky venture has the same probabilities and outcomes of success, the certainty that
the fixed return has, increases the relative attractiveness of this option.
Fourth, probabilistic insurance means purchasing an insurance against losses. It is thought of
as good evidence for the notion that the utility function is concave. According to EUT,
probabilistic insurance is superior to regular insurance. What Kahneman & Tversky (1979)
find, however, is that probabilistic insurance (which in practice means acts such as installing a burglar alarm or changing the old tires of a car) is usually not very attractive.
In Prospect Theory, the focus is on gains and losses as opposed to wealth, which is most often
used in traditional finance theories. Also, decision weights replace probabilities and loss
aversion is used instead of risk aversion. An outcome is called a prospect and involves a
decision with some risk. Decision processes are made up of two stages, the editing and
evaluation stage. In the editing stage, possible outcomes are put in order according to some
sort of heuristic. Basically, people look at the outcomes and make a mental note of an
approximate and possible average outcome. Using this average as a reference point, they then
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 28/98
28
order lower outcomes as losses and higher ones as gains. This makes sense also in real life,
where for example temperature is regarded as cold or hot (or something in between)
according to the temperature one is used to. Hence value is treated as a function of the
reference point and the distance of the value to the reference point. This has been validated
with many experiments that show how humans rather focus on gains and losses rather than
final wealth, thus opposing EUT. (Tversky and Kahneman, 1979)
The value function is shown in figure 7. As shown through experiments, losses have a larger
impact than gains, what is called loss aversion. In the realm of losses, the function is steep and
convex, whereas with gains, it is not so steep and concave. Again, this opposes EUT,
according to which the utility function is concave (see figure 7). There is also a function w,
called the probability weighting function, which shows that small probability events are
overreacted to, whereas medium or large probability events show under reaction. (Tversky
and Kahneman, 1979)
Figure 7: Value Function of Prospect Theory
Source: Own creation
Losses Gains
Value
Outcome
Reference point
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 29/98
29
Chapter 5: Empirical Research
Method
Data
and
sources
Emerging markets
The emerging markets chosen for this study are Brazil, Chile, China, India, Indonesia,
Malaysia, Mexico, Philippines, Poland, South Africa, Taiwan and Turkey, altogether twelve
countries. When considering which emerging markets to include in the sample, the countries
categorised as emerging markets by the three main data providers Financial Times Stock
Exchange (FTSE), Morgan Stanley Composite Index (MSCI) and Standard & Poor (S&P)
were considered. Out of the 19 countries classified as emerging markets by the main providers, Czech Republic, Egypt, Hungary, Morocco, Peru and Russia are left out due to not
enough necessary data from the chosen data provider.
Data prov ider
All data are downloaded from Datastream, a highly reliable and commonly used information
platform provided by Thomson Reuters and with access through Copenhagen Business
School. The data is taken from S&P Broad Market Index (BMI) for each of the sample
countries and the returns are thus in US Dollars. These specific twelve countries are chosen
due to availability of enough data from S&P BMI. Other emerging markets were considered,
as highlighted above, but left out due to lack of enough necessary data from the chosen data
provider. The S&P BMI indices comprise of small, medium, and large-cap stocks. Thus, the
country samples can be considered applicable representations of the stock markets of each
individual country. Previous studies that cover the value premium in the emerging markets
(Fama & French (1998) and Rouwenhorst (1999)) have used S&P/IFCI and MSCI index data.The constituent lists for these indices are not available through the Copenhagen Business
School access for Datastream and thus the S&P BMI indices are used. All of these indices are,
however, highly comparable. Using an index as a representative sample of the whole stock
market of a country, results in a sectoral bias. This bias depends on the criteria that the S&P
BMI indices use to pick the stocks. The most frequently traded companies are the ones
commonly included, but this is an issue with most indices.
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 30/98
30
Time per iod
The data used in this study is monthly data from July 2001 to June 2011, a time period of 10
years. Only companies that have the required ratios for the entire sample period are included.
Not including companies that have been listed and de-listed during the sample period results
in a survival bias. It is, however, also an issue in comparable studies that investigate the
emerging markets value premium.
Return index
In order to calculate the returns of each strategy, the return index (RI) is used. The return
index comprises of a price holding and assumes dividends are re-invested and used to buy
additional shares at closing price and on the ex-dividend date while ignoring taxes and anycharges occurring from the re-investment. The RI is thus defined as:
1
Where, PI shows the price-index, DY the dividend yield and n the number of days in the
financial year.
Portfolio construction
Variables
The variables used for forming the value and growth portfolios are the market-to-book value
(M/B) and price-to-cash value (P/C). These ratios are available for the same sample of stocks
for all countries, making the value premiums highly comparable. The data for market-to-book
and price-to-cash ratios and the return index are downloaded and only the companies that
have all three required ratios for the whole sample period from July 2001 to June 2011 are
included. In order to be able to compare the two investment strategies, namely value and
growth investing, value and growth portfolios are made respectively with the M/B and P/C
ratios. Separate portfolios are made with each ratio, but they include the same companies for
each country.
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 31/98
31
In the case of multi-class shares for China (H and A class), only the H class shares of
companies in mainland China that are available also for foreign traders through the Hong-
Kong Stock exchange are included. For Brazil, there are common and preferred shares (ON
and PN shares) in which case only the common shares are included. Also, for other countries,
in case of companies with two types of shares listed, only the share with less voting rights is
included.
The price-to-earnings (P/E) ratios were available for a smaller sample of stocks for the entire
time-period and thus not a comparable sample to the other two ratios. It was therefore chosen
not to use the P/E ratio as a sorting ratio in this study. The number of stocks with available
P/E ratios was especially small for countries with relatively few stocks in the respective BMI
indices, 10 for Poland, 20 for Mexico and 22 for the Philippines, which are not enough stocks
for the purposes of this study.
Sorting percentages
The value portfolio includes stocks with the lowest 50, 30 or 10 percent ratios and growth
portfolio with the highest 50, 30 or 10 percent ratios. The ratios are the ones mentioned above,
market-to-book and price-to-cash. Value and growth portfolios are made with these three
different sorting percentages 50, 30 and 10 percent in order to see whether there is a value
premium in the emerging markets and whether deep value investing pays off. The portfolios
are rebalanced yearly, so that each year the value and growth portfolios include the lowest and
highest ratio stocks respectively. Sorting stocks with the 10 percent ratio results in small
portfolios with less than five stocks for individual countries such as Poland and Philippines
with small overall sample sizes. The overall portfolios for all the 12 emerging markets
nevertheless contain enough stocks for a comprehensive analysis, even with the lowest sorting
percentage.
Returns and moments
Defining the returns
The monthly portfolio returns of the value and growth portfolios are calculated by dividing
the change in value by the beginning value. After this is done, returns that are above 200
percent per month are removed from both sets of data (data sets being the P/C and M/Breturns) for the 50 and 30 percent sorting percentages. This results in the removal of 4 values
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 32/98
32
per data set with the 50 percent portfolios and in the removal of 12 and 13 values per dataset
with the 30 percent portfolios. With the 10 percent portfolios, returns are much more volatile,
and thus it becomes appropriate to remove only values that are higher than 2000 percent per
month, resulting in the removal of 5 and 7 and values per dataset. When calculating the value
premiums across markets, stocks and countries are equally weighted. This implies that an
investor would invest the same amount in each emerging markets, independent of the size of
the markets or number of stocks in the respective portfolios. This was considered the most
applicable approach as it allows for the most emerging market country diversification.
Variance
In observing risk, a measure such as variance or standard deviation is often used and describes
deviation from the mean value. The formula for standard deviation is the following:
1
Where n is the number of observations, the observed outcome and the mean value of .Skewness
Skewness, also called the third moment, describes departures from symmetry. A positive
skewness implies a long right tail, whereas a negative skewness implies a long left tail.
Whether a distribution of returns tends more towards the left or right is significant for an
investor, as this shows whether deviations tend more towards positive or negative returns. The
formula for skewness (and the test statistic) is:
1 1 ̂ /
6/
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 33/98
33
Kurtosis
Kurtosis describes the fatness of tails and the normal distribution has kurtosis of 3. A kurtosis
higher than 3 implies fatter tails and a greater likelihood of large values, positive or negative.
Return series often have extreme observations and fatter tails, than assumptions of normality
would allow. This is especially often found in stock indices, as used in this study, rather than
in individual stocks (Tsay, 2005).
1 1 ̂/ 3
24/
Portfolio risk
Standard Deviation
In observing risk, a measure such as variance or standard deviation is often used. Such a
measure, in our case of monthly observations, is useful in determining the risks of differentmarkets, and especially those of the value and growth portfolios and whether one portfolio is
riskier in terms of its standard deviation. For formula, see page 32.
Beta
Another risk measure is the beta, which measures the systematic risk of an investment
strategy relative to the market portfolio. It is a standard finance measure that shows the
tendency of the movements of a stock or a portfolio relative to the movements of the market
and is normally used in the Capital Asset Pricing Model (CAPM). In this case the measure
will be the portfolio beta of the different investment strategies, value and growth. To obtain
the portfolio beta, it will be necessary to calculate it using the following formula:
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 34/98
34
Where, the covariance between the returns of the stocks in the market and the respective
portfolio are divided by the variance of the market. First, the betas for each individual
emerging market in our sample are calculated using monthly data between the sample period
of 2001 and 2011 and then an overall average beta for the sample is deducted. This is done
separately for each sorting variable and percentage. According to traditional finance theory,
we would expect betas of value stocks to be higher than betas of growth stocks.
Correlations
In addition to the aforementioned risk measures, the risk of a portfolio is also influenced by
the correlations of the stocks in the portfolio. An investor can reduce portfolio variance or risk
by holding securities that are not highly correlated. Indeed, the total risk of a portfolio isstrongly influenced by the correlations between the components in the portfolio. Correlation
essentially measures the co-movement or dependence between variables and can be defined
by the following equation:
,
It indicates the linear association between two variables. Correlation is between +1 and -1,
with perfect positive correlation indicated by +1 and perfect negative correlation by -1.
Correlation tends to increase when markets become more volatile (Zimmermann et al., 2003).
What we are interested in is downside volatility. If correlations are high in downturns, that is
bad news. As increased correlations in downturns reduce the benefits of diversification and
hence increase the risk. If correlations of either the growth or value portfolio are higher in
downmarkets, that is negative news for that specific investment strategy. In order to look at
this, up and down market correlations between the monthly returns of the different countries
in each portfolio are calculated as shown in Zimmermann et al., 2003. A month is classified as
an “up-up” market, if the returns of both countries are above average for the country and
investment strategy (value or growth) and as “down-down” market if the returns are classified
as below average. Correlation coefficients are computed for up-up and down-down markets,
and an overall average up-up and down-down correlation calculated from those. It is
interesting to see, first of all, if down-down correlations are higher than up-up correlations.
Further, the average up-up and down-down correlations of the value and growth strategy are
compared with each other, with a special interest in downmarket correlations.
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 35/98
35
Results
Emerging market returns and moments
In table 1 below, the number of stocks, average return, standard deviation and minimum and
maximum returns in percentage are shown for each individual country in the sample, as well
as all countries together. For all countries with altogether 1178 stocks, the mean monthly
return is 2.0442 percent and standard deviation 7.8966, meaning that if the sample is assumed
to resemble normal distribution, then about 68 percent of the returns should lie within ±1
standard deviation, i.e. within ±10 percent. The minimum return in this set of data is -32.6429
percent and maximum return 35.7953 percent, which is more than 4 standard deviations from
the mean.
Table 1: Descriptive statistics of the emerging markets included in the sample
Looking at the four moments, it can be seen that the overall variance for the sample is 0.6236,
skewness -15.7824 and kurtosis 177.7322. It is typical that stock index returns would have a
negative skew as is the case her. A longer left tail and more returns concentrated on the right,
meaning less negative returns. The high kurtosis value implies a leptokurtic distribution with
a higher peek and fatter tails than in normally distributed returns. The student’s t-test value of
9.823323 further confirms that the returns are not normally distributed. The distribution of
returns of the emerging markets included in the sample in graphical format can be seen in
figure 8.
Country
Number of
Firms
Mean in
percent
Standard
Deviation
Min return
in percent
Max return
in percent
Brazil 65 2.6430 7.2320 -26.1176 23.2505
Chile 36 1.6750 5.3587 -13.4059 23.5413
China 176 1.3399 7.8833 -18.9890 22.1752
India 169 2.1388 8.3124 -25.8128 25.1665
Indonesia 47 2.7816 8.1312 -19.7072 25.8972
Malaysia 88 1.6661 5.2373 -15.9761 17.9410
Mexico 34 3.3186 9.4635 -27.7255 29.0739
Philippines 30 1.3678 6.7113 -23.2341 21.0991
Poland 28 2.2622 9.3181 -24.5002 32.0366
South Africa 96 1.6436 5.2365 -18.8477 12.4720
Taiwan 351 1.2621 9.2234 -25.3622 25.3635
Turkey 58 2.4314 10.4664 -32.6429 35.7953
All countries 1178 2.0442 7.8966 -32.6429 35.7953
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 36/98
36
Table 2: Four moments for each of the emerging markets included in the sample
Figure 8: Distribution of returns for the emerging markets included in the sample
Country Mean Variance Skew ness Kurtosis
Brazil 0,0264 0,0052 -0,0214 2,2738
Chile 0,0168 0,0029 0,3825 1,7384
China 0,0134 0,0062 -0,3545 0,3068
India 0,0214 0,0069 -0,4830 1,3421
Indonesia 0,0278 0,0066 0,0074 0,7610
Malaysia 0,0167 0,0027 -0,4167 1,3498
Mexico 0,0332 0,0090 -0,2311 0,6102
Philippines 0,0137 0,0045 -0,1596 1,2170
Poland 0,0226 0,0087 -0,2160 1,1222
South Africa 0,0164 0,0027 -0,7036 1,1962
Taiw an 0,0126 0,0085 -0,4376 0,6023
Turkey 0,0243 0,0110 0,0793 1,9235
All countries 0,0204 0,0062 -0,1578 1,7773
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 37/98
37
Value premiums
With market-to-book value as a sorting variable and when portfolios are constructed with the
50 percent highest and lowest values, there is a monthly value premium of 0.61 percent across
the 12 emerging markets. This translates into an annual value premium of 7.345 percent. The
respective paired t-test value of 1.2 is not statistically significant. The critical value is 1.96
when n → ∞. Therefore, even though a value premium of this magnitude is found, it cannot
be statistically proven that there is a significant value premium in the selected emerging
markets. With market-to-book as a sorting variable, the value portfolio returns 32.521 percent
annually and the growth portfolio 25.176 percent. There is a value premium in 7 out of 11
years and the value premium disappears in 2001, 2007-2008 and 2011. This is shown in table
3 below.
Table 3: Year-by-year value and growth portfolio average returns with market-to-book ratio
as a sorting variable and 50 percent portfolios
Year Value Growth Difference
2001 -0.0079 0.0169 -0.0248
2002 0.0214 0.0030 0.0184
2003 0.0590 0.0379 0.0211
2004 0.0427 0.0236 0.0191
2005 0.0323 0.0199 0.0124
2006 0.0423 0.0399 0.0024
2007 0.0276 0.0340 -0.0064
2008 -0.0470 -0.0373 -0.0097
2009 0.0673 0.0499 0.0174
2010 0.0303 0.0274 0.0029
2011 -0.0014 0.0061 -0.0075
Monthly Mean 0.0271 0.0210 0.0061
Yearly Mean 0.3252 0.2518 0.0735
Yearly Mean in % 32.521% 25.176% 7.345%
T-test 1.2
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 38/98
38
The monthly value premium using price-to-cash value as the sorting variable and 50 percent
as the sorting percentage is 0.78 percent and the annual premium 9.33 percent across the 12
emerging markets used in this study. With a paired t-test value of 1.42, the value premium is
again not statistically significant, as the critical value is 1.96 when n → ∞. It thus cannot be
said that value stocks generate significantly higher returns with 50 percent sorting percentage
and price-to-cash ratio as sorting ratio, even though a premium is found. With price-to-cash as
a sorting variable, the value portfolio returns an annual average of 34 percent and growth
portfolio 24.669 percent. There is a value premium in 9 out of 11 years and the years in which
there is no value premium are 2001 and 2008. These results are shown in table 4 below.
Table 4: Year-by-year value and growth portfolio average returns with price-to-cash ratio as asorting variable and 50 percent portfolios
Year Value Growth Difference
2001 -0.0004 0.0192 -0.0196
2002 0.0136 0.0095 0.0040
2003 0.0617 0.0323 0.0294
2004 0.0269 0.0264 0.0006
2005 0.0298 0.0166 0.0132
2006 0.0511 0.0350 0.0161
2007 0.0367 0.0356 0.0011
2008 -0.0490 -0.0349 -0.0141
2009 0.0676 0.0518 0.0158
2010 0.0422 0.0227 0.0195
2011 0.0059 0.0021 0.0038
Monthly Mean 0.0283 0.0206 0.0078
Yearly Mean 0.3400 0.2467 0.0933
Yearly Mean in % 34.000% 24.669% 9.330%
T-test 1.42
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 39/98
39
When sorting the portfolios with market-to-book value with the 30 percent highest and lowest
values, there is a monthly value premium of 0.86 percent across the 12 emerging markets.
This translates into an annual value premium of 10.315 percent. The respective paired t-test
value of 1.24 is not statistically significant, as the critical value is 1.96 when n → ∞.
Therefore, it cannot be said that there is a statistically significant value premium in the
selected emerging markets using these sorting criteria. With market-to-book as a sorting
variable, the value portfolio returns 39.637 percent annually and the growth portfolio 29.321
percent. There is a value premium in 6 out of 11 years. The value premium disappears in
2001, 2006, 2008 and 2010-2011. As shown in table 5 below.
Table 5: Year-by-year value and growth portfolio average returns with market-to-book ratio
as a sorting variable and 30 percent portfolios
Year Value Growth Difference
2001 0.0101 0.0106 -0.0005
2002 0.0332 0.0103 0.0229
2003 0.0679 0.0434 0.0246
2004 0.0563 0.0266 0.0297
2005 0.0378 0.0228 0.0150
2006 0.0419 0.0482 -0.0063
2007 0.0507 0.0426 0.0080
2008 -0.0585 -0.0391 -0.0194
2009 0.0758 0.0515 0.0243
2010 0.0236 0.0350 -0.0115
2011 -0.0046 -0.0043 -0.0002
Monthly Mean 0.0330 0.0244 0.0086
Yearly Mean 0.3964 0.2932 0.1032
Yearly Mean in % 39.637% 29.321% 10.315%
T-test 1.24
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 40/98
40
The monthly value premium using price-to-cash value as the sorting variable and 30 percent
portfolios, a value premium is found again, but it is not statistically significant. The monthly
value premium is 1.13 percent and the annual premium 13.549 percent. With a paired t-test
value of 1.49, the value premium is not statistically significant and it can thus not be
concluded that value stocks generate significantly higher returns than growth stocks. When
looking at the portfolio returns of value and growth, the value portfolio returns an annual
average of 43.046 percent and growth portfolio 29.497 percent. There is a value premium in 9
out of 11 years and the years in which there is no value premium are 2002 and 2008. These
results are depicted in table 6 below.
Table 6: Year-by-year value and growth portfolio average returns with price-to-cash ratio as asorting variable and 30 percent portfolios
Year Value Growth Difference
2001 0.0165 0.0154 0.0011
2002 0.0054 0.0202 -0.0149
2003 0.0557 0.0377 0.0179
2004 0.0717 0.0382 0.0335
2005 0.0374 0.0286 0.0087
2006 0.0607 0.0314 0.0293
2007 0.0387 0.0321 0.0066
2008 -0.0569 -0.0006 -0.0563
2009 0.0903 0.0255 0.0648 2010 0.0396 0.0213 0.0182
2011 0.0161 0.0074 0.0087
Monthly Mean 0.0359 0.0246 0.0113
Yearly Mean 0.4305 0.2950 0.1355
Yearly Mean in % 43.046% 29.497% 13.549%
T-test 1.49
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 41/98
41
Let us look what happens when portfolios are constructed with 10 percent highest and lowest
market-to-book value. There is a monthly value premium of 11.82 percent across the 12
emerging markets. This translates into an annual value premium of 141.854 percent. The
respective paired t-test value of 2.17 is statistically significant (with a critical value of 1.96
when n → ∞). Thus, it can be said that value stock generate significantly higher returns when
sorted with market-to-book variable and with 10 percent largest and highest value stocks in
the portfolios. The value portfolio returns an average of 278.811 percent annually and the
growth portfolio 136.957 percent. There is a value premium in 10 out of 11 years and it only
disappears in 2007. Results depicted in table 7 below.
Table 7: Year-by-year value and growth portfolio average returns with market-to-book ratio
as a sorting variable and 10 percent portfolios
Year Value Growth Difference
2001 0.0829 0.0171 0.0657
2002 0.2518 0.0382 0.2136
2003 0.1437 0.0605 0.0832
2004 0.2875 0.0494 0.2381
2005 0.2063 0.0858 0.1205
2006 0.2280 0.0959 0.1321
2007 0.3137 0.3657 -0.0520
2008 0.1685 0.0875 0.0809
2009 0.3579 0.3121 0.0458
2010 0.2182 0.0294 0.1888
2011 0.2141 0.0156 0.1985
Monthly Mean 0.2323 0.1141 0.1182
Yearly Mean 2.7881 1.3696 1.4185
Yearly Mean in % 278.811% 136.957% 141.854%
T-test 2.17
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 42/98
42
Using price-to-cash as the sorting variable and 10 percent as the sorting percentage, the
monthly value premium is 3.89 percent, whereas the annual premium is 46.707 percent. In
testing for significance, a paired t-test value of 1.12 is found and it can be concluded that this
result is not statistically significant (with a critical value of 1.96 when n → ∞). Hence value
stocks do not generate significantly higher returns than growth stocks, even though a value
premium of this magnitude is found. With price-to-cash as a sorting variable, the value
portfolio returns an annual average of 171.073 percent and growth portfolio 124.365 percent.
There is a value premium in 8 out of 11 years and the years in which it disappears are 2008
and 2010. These results are shown in tabular format below.
Table 8: Year-by-year value and growth portfolio average returns with price-to-cash ratio as a
sorting variable and 10 percent portfolios
Year Value Growth Difference
2001 0.0106 0.0023 0.0083
2002 0.3276 0.2044 0.1232
2003 0.0967 0.0350 0.0617
2004 0.2490 0.1170 0.1320
2005 0.0851 0.0619 0.0232
2006 0.3171 0.0777 0.2394
2007 0.1075 0.1031 0.0044
2008 0.0004 0.1672 -0.1669
2009 0.0857 0.1247 -0.0390
2010 0.0588 0.1371 -0.0783
2011 0.1851 0.0142 0.1709
Monthly Mean 0.1426 0.1036 0.0389
Yearly Mean 1.7107 1.2437 0.4671
Yearly Mean in % 171.073% 124.365% 46.707%
T-test 1.12
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 43/98
43
To sum up the results described above, the value premiums are shown in tables 9 and 10
below. The value premiums with market-to-book ratio get higher as the sorting percentage
gets lower with annual value premiums from 7.345 percent with 50 percent sorting
percentage, to 10.315 percent and 141.854 percent with 30 and 10 sorting percentage
respectively. Thus deep value investing in the emerging markets seems to pay off. The value
premium is only statistically significant with 10 percent sorting percentage.
Table 9: Value premiums with sorting percentages 50, 30 and 10 percent and with market-to-
book ratio as the sorting variable
The value premiums with price-to-cash ratio also increase as the sorting percentage gets
smaller. The annual premiums are 9.330 percent with 50 percent sorting percentage, 13.549
percent and 46.707 percent with 30 and 10 percent sorting percentage respectively. This,
again, implies that also when using the price-to-cash ratio as a sorting percentage deep value
investing in the emerging markets used in this study seems to pay off. The value premiumsare, however, not statistically significant.
Table 10: Value premiums with sorting percentages 50, 30 and 10 percent and with price-to-cash ratio as the sorting variable
Sorting percent Value Growth Difference
50 percent 32.521% 25.176% 7.345%
30 percent 39.637% 29.321% 10.315%
10 percent 278.811% 136.957% 141.854%
Sorting percent Value Growth Difference
50 percent 34.000% 24.669% 9.330%
30 percent 43.046% 29.497% 13.549%
10 percent 171.073% 124.365% 46.707%
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 44/98
44
These results with the 50 percent portfolio sorting percentages and both market-to-book and
price-to-cash ratios are in alignment with historical value premiums found in the emerging
markets. Rouwenhorst (1999) for example, found an annual premium of 9.0 percent and Fama
& French (1998) reported an annual premium of 7.60 percent, both using market-to-book
ratios and 30 percent sorting percentages. When considering the sorting percentage, it should
be noted that the number of countries and stocks in the portfolios of these studies is higher,
resulting in a higher sample size. Thus, it could be concluded that perhaps the 50 percent
sorting percentage gives a value premium similar to previous studies for this reason and is
thus the most suitable sorting percentage for the number of stock returns included in our
study. At least the portfolios are large enough so that returns of single stocks do not move the
overall averages as much as with the lower sorting percentages. Thus, the results with the 50
percent sorting percentage over the entire time period from 2001 to 2011 are graphically
depicted below.
Figure 9: Year-by-year value premiums for both market-to-book and price-to-cash ratios for
the time period of 2001-2011
-3%
-2%
-1%
0%
1%
2%
3%
4%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Price-to-cash Market-to-book
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 45/98
45
Measures of risk
Standard deviation
When looking at the standard deviations of the market-to-book value and growth portfolios, it
can be seen that value stocks have a higher average standard deviation across all countries for
the time period of 2001 to 2011. Value standard deviations for the 50, 30 and 10 percent
portfolios and market-to-book ratios are 16.44, 23.56 and 166.15 percent respectively,
whereas growth standard deviations are 10.43, 14.49 and 87.05 percent. With price-to-cash
ratio as a sorting variable, standard deviations are 15.81, 21.82 and 109.22 percent for value
and 11.77, 19.14 and 74.84 percent for growth. These findings are seen in tables 11 and 12.
Table 11: Average standard deviations of the market-to-book value and growth portfolios
Table 12: Average standard deviations of the price-to-cash value and growth portfolios
The difference is about 6 percent with the 50 percent portfolios, 9.1 percent with 30 percent
portfolios and 7.91 percent with the 10 percent portfolios. The findings are somewhat smaller
when stocks are sorted according to the price-to-cash ratios with differences of 4.0 percent,
2.7 percent and 3.44 percent with the 50, 30 and 10 percent portfolios.
When looking at the yearly standard deviations of the value and growth portfolios with the 30
percent portfolios and market-to-book ratio (figure 10) and price-to-cash ratio (figure 11), it
can be seen that the standard deviations are closer to each other in certain years. With market-
to-book ratio, growth stocks have a higher standard deviation in 2010 and both portfolios
come close together in 2002. With price-to-cash, the standard deviations of growth stocks are
higher in 2002 and around 2008. Considering these time periods, it could be interpreted that
growth stocks become more volatile or risky during and after stock market crises. Such as the
stock market bubble at the turn of the century and the current financial crisis that started in
2008, but hit the Emerging Markets with a delay.
Portfolio Value Growth Difference
Market-to-book - 50 percent 0.1644 0.1043 0.0601
Market-to-book - 30 percent 0.2356 0.1449 0.0907
Market-to-book - 10 percent 1.6615 0.8705 0.7910
Portfolio Value Growth Difference
Price-to-cash - 50 percent 0.1581 0.1177 0.0404
Price-to-cash - 30 percent 0.2182 0.1914 0.0268
Price-to-cash - 10 percent 1.0922 0.7484 0.3437
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 46/98
46
Figure 10: Average yearly standard deviations of the market-to-book value and growth
portfolios with 30 percent sorting percentage and between 2001 and 2011
Figure 11: Average yearly standard deviations of the price-to-cash value and growth
portfolios with 30 percent sorting percentage and between 2001 and 2011
Beta
The betas for the value and growth portfolios with the different sorting variables and
percentages can be seen in tables 13 and 14. As shown in the tables, the value portfolio betas
are slightly higher across the board, except with market-to-book and 10 percent portfolios,
where the growth portfolio has a higher beta. Thus, according to their betas, value stocks
seem to be riskier than growth stocks in our sample, as shown below.
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
2001 2003 2005 2007 2009 2011
Value
Growth
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
2001 2003 2005 2007 2009 2011
Value
Growth
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 47/98
47
Table 13: Average betas of the market-to-book value and growth portfolios
Table 14: Average betas of the price-to-cash value and growth portfolios
According to the asset pricing theory, the market has a beta of approximately one and it is
difficult to form portfolios with better diversification than that. A beta that is smaller than one
implies volatility that is lower than that of the market. A higher than one beta means greater
volatility than that of the market. (Elton, Gruber, Brown, & Goetzmann, 2003) In our results,
the growth portfolio has a beta that is lower than one with the 30 and 50 percent portfolios,
implying that investing in growth stocks is less risky than investing in the market, which is
somewhat surprising. Also, the value portfolio with market-to-book sorting variable and 10
percent portfolios has a beta of 0.5565, also surprising. The betas of the value portfolio with
30 and 50 percent sorting percentages are all above one, meaning that value investing is
somewhat riskier than investing in the market portfolio.
Correlation
With regards to correlations, it will be investigated whether correlations are higher in
downmarkets than upmarkets. This is significant for an investor, as it is exactly in
downmarkets that protection from diversification would be most useful and if correlations are
higher in downmarkets, then that is bad news for the investor. Second, we will see if there is a
difference in correlations for the value and growth portfolios, especially in downmarkets.
Lower correlation for one investment strategy would imply that strategy is less risky.
First of all, let us look at results with market-to-book ratio and 50 percent portfolios. As seen
in tables 15 and 16, downmarket correlations are higher than upmarket correlations for both
the value and growth portfolio. In the case of value portfolio, the downmarket correlation is
0.16645 and upmarket correlation 0.05440. In the case of growth portfolio, the downmarket
correlation is 0.29222 and upmarket correlation 0.06811. This is bad news for both the value
Portfolio Value Growth Difference
Market-to-book - 50 percent 1.0506 0.9044 0.1462
Market-to-book - 30 percent 1.0914 0.9043 0.1871
Market-to-book - 10 percent 0.5565 1.7592 -1.2027
Portfolio Value Growth Difference
Price-to-cash - 50 percent 1.0727 0.8510 0.2217
Price-to-cash - 30 percent 1.0775 0.9469 0.1306
Price-to-cash - 10 percent 1.2098 1.0041 0.2057
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 48/98
48
and growth investor as it implies that due to higher correlation in both portfolios during
downmarkets, the diversification benefits are lower just when protection is most needed.
Tables 15 and 16: Up-up and down-down market correlations with market-to-book ratio as asorting variable and 50 percent portfolios
Now, moving onto look at value versus growth portfolio correlations in down and upmarkets.
They are quite similar during upmarkets with a correlation for value portfolio of 0.05440 and
correlation for growth slightly higher 0.06811. In downmarkets, however, value portfolio
correlation 0.16645 is lower than growth portfolio correlation of 0.29222. This implies that
the value portfolio enjoys better diversification benefits in downmarkets than the growth
portfolio. Since a lower correlation implies that the returns of countries move in differentdirections, having such a situation especially in downmarkets is preferable as it decreases
portfolio risk. This implies that when looking at correlations between the selected emerging
markets country returns in a portfolio as an indicator of risk, the value portfolio is less risky in
downmarkets due to diversification benefits. The significance of this difference between the
correlations of value and growth portfolio remains somewhat questionable however.
Correlations Matrix - Value
Brazil Chile China India Indonesia Malaysia Mexico Philippines Poland South Africa Taiwan Turkey
Brazil -0.1473153 0.311982016 0.218829735 0.243274658 0.145575523 -0.1403037 0.053609702 0.047507405 0.02719715 -0.15233197 0.424670471
Chile 0.251322941 -0.12717474 -0.11107071 -0.188475 -0.08933796 0.090660878 -0.11894111 -0.12827487 -0.08176214 0.101765012 0.127576861China 0.158573215 -0.1426769 0.348713582 0.163553056 0.101853943 -0.148087 0.186395943 -0.02461329 -0.13486888 0.039246572 0.372367207
India 0.507805667 -0.04392562 0.365067615 0.196320113 -0.04032146 0.077279758 0.190415137 -0.01900249 -0.13105801 0.316149612 0.330119778
Indonesia -0.0743119 -0.11419087 0.268460535 0.094263033 0.061376522 0.09002019 0.225466508 -0.05619373 0.237004994 0.122557231 0.350444648
Malaysia 0.012139648 -0.20198853 0.257670421 0.178014027 0.148823677 -0.01135693 -0.05495081 -0.14264487 -0.02536561 -0.24120123 0.078553466
Mexico 0.252379302 0.429044795 0.372547754 0.479661586 0.308506972 0.015765153 0.006279718 0.00419251 -0.14805675 0.111277548 0.020998013
Philippines 0.290262649 0.225833431 0.101738467 0.229064596 0.361799892 0.260580056 0.304133798 0.10529153 0.186340644 0.275246771 0.493411148
Poland 0.114058575 0.123069712 0.04981019 0.179201661 0.16843207 0.00529873 0.086299008 -0.01862572 -0.02914449 -0.12301224 -0.14683655
South Africa 0.167834163 0.058500675 0.002272102 0.249115121 0.449745365 -0.09519928 0.453246224 0.256292738 0.071552012 -0.21605322 0.03803108
Taiwan 0.151697563 0.006092583 0.218876318 0.245754145 0.105698503 0.409772089 0.152184819 0.230724849 -0.24065224 0.125459648 0.046860838
Turkey 0.194972434 0.200063104 0.429851538 0.241489699 0.026417016 0.003257138 0.356763628 0.319698921 0.076977266 0.007874836 0.111426149
Mean - up 0.054403976
Mean - down 0.166540436
Correlations Matrix - Growth
Brazil Chile China India Indonesia Malaysia Mexico Philippines Poland South Africa Taiwan TurkeyBrazil 0.043418567 0.013577343 0.295444301 0.089219335 0.052586136 -0.23290712 -0.23791795 -0.23014983 -0.07623562 -0.17704139 -0.20838082
Chile 0.669231259 0.428815226 0.118643212 0.25886553 0.110290041 0.102117542 0.482119118 0.149065299 0.114904863 0.061606008 0.013587469
China 0.342117504 0.292471779 0.456720644 0.25000491 -0.14572855 0.120126166 0.311582287 0.014089706 0.086977708 0.095497462 0.310899192
India 0.557698609 0.379475656 0.630079692 0.273990858 -0.07734015 0.121249463 0.099604244 -0.06429171 -0.0093653 0.028696561 0.143775015
Indonesia 0.281083442 0.259308268 0.200687295 0.136927208 0.04040452 0.019804225 0.284519869 0.027939452 0.247630831 -0.09593287 -0.17021341
Malaysia 0.252970673 0.125143668 -0.0283078 0.186319256 0.37333493 0.245544273 0.043750497 0.011287839 0.037947953 -0.07431897 -0.23452281
Mexico 0.295046674 0.069876908 0.162583556 0.126407471 0.325943709 0.094392041 0.183101005 -0.23109894 0.180837518 0.177617345 -0.15687999
Philippines 0.274921529 0.245748011 0.112835657 0.291366892 0.444578027 0.143660875 0.206622975 0.296643409 0.016241357 0.147391361 -0.07090229
Poland 0.506510333 0.300786908 0.328501608 0.429836025 0.257170395 -0.10485249 0.38739782 0.293538804 -0.01223032 -0.12952126 -0.21633042
South Africa 0.62661926 0.184497749 0.314031259 0.625093188 0.256728619 0.165504081 0.298677195 0.420236061 0.452288315 0.518645806 0.029631075
Taiwan 0.289388101 0.261376475 0.465328763 0.119729801 0.351757673 0.098002936 0.401155205 0.104682257 0.277569069 0.203099391 0.190736759
Turkey 0.320742808 0.379309325 0.465357588 0.394199849 0.269089941 0.0415558 0.184111692 0.300860939 0.214390636 0.47232201 0.477447223
Mean - up 0.068118781
Mean - down 0.292220733
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 49/98
49
When looking at the results with the market-to-book ratio and 30 percent portfolios, as shown
in tables 17 and 18, the story is the following. Downmarket correlation for the value portfolio
is 0.06621 and upmarket correlation -0.00389. For the growth portfolio, downmarket
correlation is 0.21217 and upmarket correlation is 0.02297. This is again bad news for both
value and growth investors, as downmarket correlations are higher implying lower
diversification benefits at riskier economic conditions. The difference is much higher for the
growth portfolio, as see in the numbers.
Tables 17 and 18: Up-up and down-down market correlations with market-to-book ratio as asorting variable and 30 percent portfolios
When comparing value and growth portfolio correlations in down and upmarkets, we can
observe the following. In upmarkets, the value portfolio correlation is -0.00389, very close to
zero and the growth portfolio correlation is 0.02297 - also close to zero. In downmarkets, the
value portfolio has a correlation of 0.06621 and growth portfolio 0.21217. Again, we can see
that the value portfolio correlation is lower than that of the growth portfolio in downmarkets,
which is good news for the value investor who has more diversification at economic
downturns when it is crucial. This result is similar to that obtained with the market-to-book
and 50 percent portfolios.
Correlations Matrix - Value
Brazil Chile China India Indonesia Malaysia Mexico Philippines Poland South Africa Taiwan Turkey
Brazil -0.04942115 -0.16632742 -0.00383487 0.118217422 -0.00050428 -0.00549208 -0.00162627 -0.13872675 0.178966307 -0.14021482 -0.01949695
Chile 0.292727814 -0.01638519 -0.07836463 -0.04859334 0.139519104 0.101561554 0.046537221 -0.05887363 -0.03441954 -0.07760224 0.314215494
China 0.282713114 0.199212603 -0.23320694 -0.03135672 0.280389566 -0.09767502 -0.03048434 0.077835742 -0.21948961 0.130719111 -0.20062058
India 0.137444624 0.145501953 0.119961531 -0.20656747 -0.21896734 0.116646939 0.285613989 -0.04610957 -0.02496173 -0.0793457 0.038292527
Indonesia 0.054291441 -0.04763866 0.175970073 -0.01432493 -0.0084455 -0.28315024 0.185520577 0.014186689 -0.12008238 0.117490744 0.024017803
Malaysia 0.115779873 -0.10345001 0.288606422 -0.08391812 0.29613148 -0.0735147 0.060636199 -0.25045665 0.55755364 -0.21151114 -0.36374039
Mexico -0.13673251 -0.20604678 -0.07327784 -0.16467135 -0.17377985 0.022060523 0.098108571 0.088672222 -0.12779353 0.110348328 0.091799744
Philippines 0.183884605 -0.08958122 0.273129292 0.238670455 -0.02391397 0.142279842 -0.15873627 0.012903303 0.157866094 -0.23329668 0.587468372
Poland 0.093985145 -0.13076133 0.32262865 0.06861287 0.423919196 0.123884944 -0.10218293 0.290222567 -0.01366106 0.144301563 -0.11910624
South Africa -0.02377433 -0.01210467 0.151241493 -0.06777767 -0.37098262 -0.0973871 0.230348236 0.203846426 -0.1648498 -0.13738271 -0.23738946
Taiwan -0.07060643 -0.22811871 0.366755116 -0.04984392 -0.06652591 0.277220478 -0.20928473 0.264038431 0.04778668 0.216612186 0.072318037
Turkey -0.01674717 -0.09217757 -0.02590099 0.101389285 -0.13443923 0.18709437 0.236082084 0.191814413 0.120658551 0.334144426 0.288695136
Mean - up -0.00388624
Mean - down 0.066209238
Correlations Matrix - Growth
Brazil Chile China India Indonesia Malaysia Mexico Philippines Poland South Africa Taiwan Turkey
Brazil -0.06066407 -0.22641628 -0.20775319 0.146231577 -0.0868567 0.361059378 0.214425217 0.049089347 0.0510295 0.022887406 -0.11701923
Chile 0.119152701 -0.3222914 0.090550132 -0.17464439 0.155114864 0.108499464 0.411788917 0.171071249 -0.10693084 -0.13204306 -0.19643584
China 0.067273606 0.136725682 0.492292896 0.419769438 -0.01475543 0.23497169 -0.1455471 -0.08657734 -0.16416137 -0.08805551 -0.02810609
India 0.090590089 0.254360418 0.36654551 -0.03861905 -0.20913495 -0.06497789 -0.07424887 0.137126339 0.051450616 0.000928265 -0.14936295
Indonesia 0.364209656 0.492900372 0.308622238 0.566157883 0.348454409 0.062736366 -0.01803957 0.018424503 0.210810066 0.035353097 0.220010779
Malaysia 0.376042961 0.387414716 0.295120628 0.293167075 0.57700782 0.037195326 -0.06140577 -0.07246429 0.090825707 0.326220004 -0.39167231
Mexico 0.036611882 0.403323437 0.413941341 0.228235241 0.3409771 -0.0177066 0.2798897 0.355509306 0.064284238 0.241011998 -0.1605848
Philippines 0.068773139 -0.04321366 0.153926164 0.24283939 0.033295914 -0.01853212 -0.02804621 -0.01579633 0.225931552 -0.00285677 -0.06515771
Poland 0.16888998 0.165188759 0.355826543 0.461804242 0.382239135 0.052948597 0.323620304 0.101805514 -0.22192145 -0.02465378 -0.18186097
South Africa 0.105803556 0.282133857 0.114491644 0.297706584 0.340980758 0.155322696 0.087812522 0.020716344 0.149650215 0.217805124 -0.30294934
Taiwan 0.117275464 0.044311857 0.173407548 0.208560912 0.216511284 0.107993305 0.428986586 0.337006203 0.151213965 0.291606413 -0.12302633
Turkey 0.225169262 -0.06244387 0.167719875 0.379506518 0.370864552 -0.00889502 0.343955851 0.198465996 -0.06043802 0.032333968 0.263567803
Mean - up 0.022966022
Mean - down 0.212171789
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 50/98
50
When looking at the correlations with price-to-book ratio, the results paint the following
picture. With 50 percent portfolios shown in tables 19 and 20, the downmarket correlations
are again higher than the upmarket correlations. For the value portfolio, downmarket
correlation is 0.18564 and upmarket correlation 0.11054. For the growth portfolio,
downmarket correlation is 0.23582 and upmarket correlation 0.03116. Overall, this is again
bad news for investors as correlations are higher in downmarkets when protection would be
most desirable.
Tables 19 and 20: Up-up and down-down market correlations with price-to-cash ratio as asorting variable and 50 percent portfolios
As evident, correlations during upmarkets are higher for the value portfolios with the value
0.11054 versus that for the growth portfolio of 0.03116. The opposite is true in downmarkets
where correlation for the growth portfolio is 0.23582 and that of the value portfolio is
0.18564. Thus, we can conclude that when stocks are sorted according to their price-to-cash
ratios and 50 percent portfolios, value investors enjoy higher diversification benefits in
downmarkets than do growth investors. This result is in alignment with the earlier results
using market-to-book ratio as a sorting variable.
Correlations Matrix - Value
Brazil Chile China India Indonesia Malaysia Mexico Philippines Poland South Africa Taiwan Turkey
Brazil 0.241464081 0.044212735 0.067719194 -0.05259816 0.129063669 -0.10408155 0.181091495 -0.03857169 -0.14192807 0.456840012 -0.10355168
Chile -0.17186387 0.228958487 -0.04418519 -0.0366451 0.290261512 -0.01401026 0.296720284 0.068686054 -0.21162812 -0.01156125 0.201611302
China 0.066876335 0.154291978 0.318360457 0.131151462 0.139699324 -0.08641943 0.285107275 0.115010421 0.102094638 0.263801327 0.231643369
India 0.319861493 0.110054076 0.263809347 0.578889939 -0.00315404 0.206504483 0.003215797 0.234095365 -0.08398025 0.223659532 0.257566669
Indonesia 0.229891765 0.061346183 0.238569518 0.22486552 0.27180386 0.192935772 0.058937593 0.153535861 -0.25389958 0.095709828 0.170307582
Malaysia 0.009419031 0.193920735 0.034152526 0.103569246 0.078628277 0.426526118 0.107093933 -0.04906711 -0.07112962 -0.07766994 0.035331119
Mexico 0.666355586 -0.02377175 0.090456047 0.506392363 0.442369292 0.141784563 0.135575528 -0.07367768 0.190846728 0.181668147 0.25924939
Philippines 0.559038967 0.475012395 0.248221864 0.47272672 0.274557864 0.09588176 0.433923799 0.307933483 -0.12922225 0.030013533 -0.07794824
Poland 0.1136922 0.081750514 -0.07549938 0.052113076 0.250689096 0.024851989 -0.08265248 0.127845682 0.149373666 0.590181815 0.260603792
South Africa -0.06275473 0.088343094 -0.00593697 -0.03367065 0.490492437 0.224785325 0.291209697 0.276872027 0.203994316 0.044887622 -0.012345
Taiwan 0.616804024 -0.20370074 0.087292589 0.601700551 0.280045588 0.265605309 0.060574378 0.291262712 0.003699054 -0.02872787 0.012846981
Turkey 0.102788774 -0.01802648 0.260193278 0.393273636 0.317543638 -0.09830541 -0.04963957 0.291221734 0.288181161 0.085888707 0.438000942
Mean - up 0.110538137
Mean - down 0.185638528
Correlations Matrix - Growth
Brazil Chile China India Indonesia Malaysia Mexico Philippines Poland South Africa Taiwan Turkey
Brazil 0.262992876 0.261835841 0.100117964 0.063313444 0.231611388 -0.33170691 0.080944039 0.282006089 0.00886515 0.012982579 -0.33225357
Chile 0.034654475 0.013384455 0.106913056 -0.22662878 0.469071554 0.178261244 -0.08537526 0.027480176 0.004859387 -0.13791367 -0.11077258
China 0.268550461 0.21410465 0.217496898 0.158423445 0.302438658 -0.10908478 0.392134567 0.2549398 0.012869575 0.107591193 0.083752241
India 0.172866777 0.234256896 0.318534614 0.372537427 0.089863435 -0.13676713 0.09564198 0.091232625 0.303675382 0.129184691 -0.09989946
Indonesia 0.223985353 0.245002631 0.227857076 0.296550526 -0.16638839 -0.15551066 0.238444924 0.036752148 0.070138811 0.058388869 -0.15680773
Malaysia 0.274890843 0.008116583 0.435108755 0.439025506 0.565473728 -0.03808201 -0.14024601 -0.12564261 0.215919005 -0.18988834 -0.30060319
Mexico -0.0276635 0.141562592 -0.00411484 0.226100213 -0.04379209 0.03309534 0.085789657 0.110818651 -0.17992282 -0.13099384 -0.11201232
Philippines 0.020920843 -0.07186812 0.096064397 0.23604097 0.718524455 0.202284462 0.108934803 0.089806949 -0.22165519 0.09508874 0.138283538
Poland 0.640180036 0.529568117 0.494694037 0.642392012 0.239689749 0.23857221 0.16603387 0.225211581 0.028294917 -0.26509395 -0.09844699
South Africa 0.132670213 0.03610004 0.096181424 0.544836277 0.047835822 0.270340834 0.172129258 0.344868148 0.305805733 -0.03385112 0.14824602
Taiwan 0.184834698 -0.16166396 0.398061374 0.087001303 0.386787915 0.332930099 0.256479754 0.446390234 0.182530045 0.295798602 -0.09014004
Turkey 0.320356636 0.425320136 0.354801183 0.34790015 0.08927894 0.04230939 -0.09841036 0.07807374 0.339673835 0.219115262 0.314169358
Mean - up 0.031162213
Mean - down 0.23581691
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 51/98
51
The results with price-to-cash ratio and 30 percent portfolios reveal the following. Correlation
for value portfolio is 0.16059 in downmarkets and 0.09525 in upmarkets. The correlation for
growth portfolio is 0.13935 in downmarkets and 0.07589 in upmarkets. This is again bad
news for both value and growth investors, because correlations are higher in downmarkets
when diversification would be most desirable. The correlation in upmarkets for the value
portfolio is higher than that of the growth portfolio and the correlation in downmarkets is also
slightly higher for the value portfolio. Meaning that value portfolio has higher risks in up and
downmarkets. However, the difference is not great. Nevertheless, this result of higher
correlation for the value portfolio in downmarkets is the opposite from the previous results
presented above and not desirable for the value investor.
Tables 21 and 22: Up-up and down-down market correlations with price-to-cash ratio as asorting variable and 30 percent portfolios
All in all, however, the correlation of the value portfolio in downmarkets when diversification
is needed the most seems to be higher than the correlation of the growth portfolio with all
sorting ratios and portfolios with the exception of price-to-cash and 30 percent portfolios. We
can thus conclude that when looking at country-to-country correlations with those emerging
markets that are included in the sample, value investing seems to be a safer approach
especially in downmarkets. This is good news for value investors. It is, however, difficult to
explain theoretically as we will see later on in chapter 6 on pages 60-61.
Correlations Matrix - Value
Brazil Chile China India Indonesia Malaysia Mexico Philippines Poland South Africa Taiwan Turkey
Brazil -0.06324129 0.169636557 -0.19397992 -0.00011038 0.126214919 -0.26725568 -0.10668007 0.824007459 0.348070058 0.512950609 0.599771253
Chile 0.240983546 0.090004115 -0.17433849 -0.08438261 0.456904152 -0.09360099 -0.09784388 0.026609409 0.175136533 0.579472733 0.217990673
China -0.04883421 -0.08061152 0.345336693 0.117732684 0.095255104 0.0188329 -0.12032171 0.104816966 0.127704822 0.195213598 0.13212676
India 0.032959878 0.170952134 0.085687478 -0.02270527 0.291062209 0.220200544 -0.07766009 -0.25058351 0.304727587 -0.24435338 0.010319785
Indonesia 0.072370066 -0.06562967 0.312598761 -0.00693148 -0.18612402 -0.03296991 0.060876704 0.016171172 -0.09806181 0.105336887 0.193962434
Malaysia 0.175860313 0.206111423 0.196922898 0.477613418 0.112898927 -0.09519005 0.040945032 -0.08181461 0.180506454 0.130037915 0.003812998
Mexico 0.248550549 -0.08703272 0.017013932 0.118893601 0.369607658 -0.03680674 0.163263489 -0.0244062 -0.21787458 0.066716006 -0.11639746
Philippines 0.057504114 0.206967658 0.355080515 0.265621735 0.442845488 0.100684686 0.712849757 -0.06311832 0.148391271 0.212875661 0.213332438
Poland -0.0955789 -0.03369733 0.200044011 -0.00957065 0.142633344 0.169971618 -0.03641754 -0.02471045 -0.17424098 0.348251825 0.148922464
South Africa 0.265902501 0.272967025 -0.03170859 0.470285345 0.17474306 0.426160257 0.557659229 0.437375718 -0.18386408 0.017308593 0.338436049
Taiwan 0.199045051 -0.00696007 0.280717173 0.072668201 0.462481386 0.243015508 0.089302583 0.276856171 0.081179109 0.1012538 0.69464771
Turkey 0.388193928 0.17277595 -0.02789119 0.004348996 0.196098742 0.098071668 0.037743874 0.29171578 -0.0349948 0.264741634 0.051763437
Mean - up 0.095252091
Mean - down 0.160591723
Correlations Matrix - Growth
Brazil Chile China India Indonesia Malaysia Mexico Philippines Poland South Africa Taiwan Turkey
Brazil 0.237745526 -0.13402254 0.029837394 0.012659074 0.378035021 0.37954937 -0.04110701 0.352738656 0.014927133 0.397615601 0.070113519
Chile -0.04605337 -0.13557614 -0.06080696 0.042153978 0.408820877 0.376408565 -0.02216426 -0.24601026 -0.066925 -0.01656678 -0.04422592
China 0.008190267 -0.040813 0.243110656 -0.06566021 0.08329042 0.093926391 0.250259601 0.071060712 0.447356948 0.120914961 0.043530764
India 0.18032615 0.068280299 0.48246232 -0.17322421 0.132286847 0.183863394 0.51336897 0.426348657 0.197841891 0.411664788 -0.17694405
Indonesia -0.11774226 0.202248943 0.174688593 0.144921733 -0.02823939 -0.14100418 -0.05726979 -0.05067753 -0.17097359 0.040616457 -0.02686755
Malaysia 0.008417641 0.040596185 0.316249496 0.320441064 0.141123957 0.345755133 -0.32835336 -0.17316291 -0.01881698 0.034955173 -0.19069639
Mexico 0.328758149 0.157664576 0.170976162 -0.02597995 0.287422561 -0.09008494 0.182945066 0.02393041 -0.08915603 0.492214316 -0.185448
Philippines 0.287507053 0.256515134 -0.06117423 0.309744126 -0.10103697 0.14358418 -0.1562076 0.31278637 -0.12208961 0.149594328 -0.06202896
Poland 0.17057204 0.234099911 0.269820671 0.151463617 0.199422355 0.124424736 0.305228904 0.04717578 0.739179596 -0.01741559 0.027424356
South Africa 0.404210864 -0.03915762 -0.07841822 0.159144172 -0.02331408 0.013322646 0.394612233 0.205197199 0.273272713 -0.30960026 -0.05298271
Taiwan -0.21703365 0.058238633 0.387578853 0.039275486 0.182769084 0.572739627 0.303817004 -0.18003592 0.288634956 0.075820567 -0.05203364
Turkey 0.371559082 0.148067838 -0.14032957 0.081305245 -0.07270082 0.138810547 0.33692949 0.096478937 -0.08223158 0.317440558 0.287869928
Mean - up 0.075890623
Mean - down 0.139350129
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 52/98
52
Chapter 6: Discussion
Answering the research questions
Is there a value premium in the emerging markets between 2001 and 201 1?
It is by now an established finding that value stocks generate higher returns over long periods
of time both in developed and emerging markets. The findings of this study are in alignment
with previous research and show that there is a value premium in selected emerging markets
over a time period from 2001 to 2011. The value premiums with the market-to-book ratio and
50, 30 and 10 percent portfolios are 7.345, 10.315 and 141.854 percent. With price-to-cash as
a sorting percentage, the value premiums are 9.330, 13.549 and 46.707 percent. One should,
however, note that these findings are not statistically significant. What is also interesting
when looking at the 30 or 50 percent sorting ratio with market-to-book value is that the value premium disappears in 2001, 2006-2008 and 2010-2011. These years correspond to economic
downturns and would thus imply that in downturns value investing generates more negative
returns than growth investing.
1. Does deep value investing in the emerging markets generate an even
higher value premium?
It can be seen that the lower the sorting percentage, the higher the value premium. Deep value
investing thus seems to generate even higher returns. The value premium with market-to-book
ratio and 10 percent portfolios is statistically significant, whereas the value premium with
price-to-cash ratio and 10 percent portfolios is not.
2. Are emerging market value stocks more risky than growth stocks when
measured in traditional risk measures beta and standard deviation?
When looking at whether value stocks are more risky than growth stocks when measured in
terms of standard risk measures, such as standard deviation and beta, we find that value stocks
do seem to have higher standard deviations and betas. What should be questioned, however, is
whether these standard measures are useful measures of risk and something that will be
looked into in the next sections. Also interesting is that with 30 percent portfolios, growth
stocks have higher standard deviations in the downturns of 2002 and 2007-2008 as seen in
figures 10 and 11 on page 46. This is especially interesting when remembering that the value
premium disappears with market-to-book value and 30 percent portfolios in 2001, 2006, 2008
and 2010-2011. Thus one could conclude that even though the value premium disappears
during that time, the standard deviations of value stocks are at lowest points in those years,
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 53/98
53
whereas the standard deviations of growth stocks increase. This shows that with these risk
measures growth stocks are more risky at downturns and value stocks less risky.
3. What are the correlations between selected emerging market country
returns for
value
and
growth
portfolio s
in
downmarkets?
When looking at correlations between emerging market country returns for value and growth
portfolios in down- and upmarkets, it is found that value stocks have lower correlations in
downmarkets. This answers the third sub-question and is good news for the value investor, as
it is exactly in downmarkets when protection is needed. This finding is difficult to explain
theoretically, but will be looked at in the following parts.
4. Can value
premium
be
better
explained
with
standard
finance
theory
or
behavioural finance?
While there is broad agreement on the existence of the value premium, there is much less
agreement on why it exists. As presented in the theory section, two schools of thought,
traditional finance and behavioural finance view the existence of the value premium from
different perspectives. Traditional finance works under the assumption of market efficiency
and according to their Efficient-market Hypothesis (EMH), a value premium can only exist
due to higher risk of value stocks as risk and return go hand-in-hand when investors arerational and markets efficient. In quite a contrary manner, behavioural finance does not have
much faith in the rationality of investors and argues that a value premium arises when naïve
investors get over-excited about the growth prospects of growth companies and purchase
these stocks when they are over-priced, thus behaving in a non-rational ways and creating
inefficiencies in the markets, which later result in corrections. In the following, the results of
this study, as well as those of previous studies, will be looked at both through the lenses of
traditional and behavioural finance to see how they stack up in explaining the value premium
as well as various risk measures also investigated in this study.
5. Where can value be currently found in the emerging markets?
This question will be addressed in chapter 7 starting on page 66.
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 54/98
54
Traditional finance explanation
The traditional finance explanation for the value premium has its basis in the argument that
risk and return go hand in hand. According to traditional finance theory, for value stocks to
give higher returns than growth stocks as evidence shows, they must be a more risky
investment. According to Fama & French (1998) and other traditional finance theorists, the
value premium is in fact a risk premium and compensates for the higher risk of value
companies. Where that risk arises is debatable, but Fama & French (1998) call it broadly the
risk of financial distress. Let us now look at some traditional measures of risk, namely
standard deviation and beta, as well as downmarket correlation with the findings of this study.
Standard deviation
When looking at the standard deviations of the market-to-book and price-to-cash value and
growth portfolios, it is shown that value stocks have a higher average standard deviation
across all countries within the time period of 2001 to 2011 (see tables 11 and 12 on page 45).
The differences with market-to-book ratio are about 0.06 with the 50 percent portfolios, 0.091
with 30 percent portfolios and 0.791 with the 10 percent portfolios. The findings are smaller
when stocks are sorted according to the price-to-cash ratios with differences of 0.04, 0.027
and 0.344 with the 50, 30 and 10 percent portfolios. Since the returns of the value stocks are
also higher, this finding does indeed go together with the assumption of traditional finance
that risk and return go hand-in-hand.
When looking at standard deviation as a measure of risk, however, there are aspects that one
should take into consideration. Lakonishok, Shleifer and Vishny (1994) for example find that
the distribution of returns for value stocks is more skewed to the right, meaning that value
stocks have more upside potential than growth stocks. It shows that standard deviation is a
problematic measure of risk, because for it to show an unbiased result, the distribution should
not be skewed. In the case of emerging market returns, however, this is rarely the case. As
shown in figure 8 on page 36 (and figures 12-15 on pages 56-59), emerging market returns in
this study are not normally distributed and show signs of skewness. This is important, because
it is this upside potential that investors desire and if some of the higher standard deviations for
the value portfolio in our study come from upside potential rather than downside risk, than
that is rather good than risky.
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 55/98
55
Let us then investigate this argument further and look at the distributions of returns for our
value and growth portfolios when sorted with the 50 percent sorting ratio and both variables.
We will only look at the results using this sorting percentage, because they return distributions
that are closest to normality as a higher number of stocks are included in the sample when
compared with smaller sorting percentages.
The value portfolio distribution with market-to-book ratio as a sorting variable and 50 percent
portfolios is shown in figure 12 and the growth portfolio distribution in figure 13. When
looking at the standard deviations of both portfolios, it can be seen that the standard deviation
of the value portfolio 16.4412 is higher than that of the growth portfolio 10.4278. The
skewness for both portfolios is positive. This means that there are more returns that are
greater than the average than there are returns that are less than average. This is good news for
the investor. With a value skewness of 2.3335 versus 0.9544 for growth, the number of values
that are greater than average is even higher for the value portfolio than for the growth
portfolio. In other words, even though the standard deviation is also high for value, a greater
deal of this comes from returns that are higher than the average in the case of value. Thus,
value stocks show greater upside potential. One must note, however, that even though outliers
are removed from data, the remaining large and small values may be a factor in the findings.
When looking at the maximum and minimum returns for value, the maximum of 1.9076 is
higher than the maximum return of 0.8446 for growth. And the minimum return of -0.6799
for value is lower than the minimum return of -0.9439 for growth. This is also seen in the
kurtosis value for value of 22.3775 versus 7.4499 for growth, i.e. both distributions have fat
tails and are peaked. All in all, value standard deviation and skewness are higher. Also, value
has a higher mean and higher maximum value, whereas growth has a lower mean and higher
minimum value. This would imply that some of the standard deviation comes in fact fromvalues that are higher than the average, showing higher upside potential for value stocks,
rather than greater riskiness.
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 56/98
56
Figure 12: Value portfolio distribution with market-to-book ratio as sorting variable and 50
percent portfolios
Figure 13: Growth portfolio distribution with market-to-book ratio as sorting variable and 50
percent portfolios
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 57/98
57
When looking at the distributions with price-to-cash ratio as a sorting variable and 50 percent
portfolios in figures 14 and 15, it can be seen that, again the standard deviation of returns of
15.8128 is higher for value than it is for growth 11.7722. Both return distributions have a
positive skew, but that of the value portfolio is again higher with 1.0044 versus 0.3493 for
growth. The maximum and minimum values for both portfolios are relatively close to each
other. The maximum value return is 1.3732 and the maximum growth return is 0.9321.
Whereas, the minimum value return is -0.9439 and the minimum growth return is -0.9122,
very close to each other. Thus, it can again be interpreted that even though the standard
deviation of value is higher, value stocks have greater upside potential than growth stocks.
Figure 14: Value portfolio distribution with price-to-cash ratio as sorting variable and 50
percent portfolios
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 58/98
58
Figure 15: Growth portfolio distribution with price-to-cash ratio as sorting variable and 50
percent portfolios
Thus, it can be concluded that even though value stocks in our sample seem to have higher
standard deviations, their returns are also more skewed to the right. This means that a part of
the higher standard deviation figure actually comes from upside potential and not downside
risk. Since it is precisely downside risk that is of concern to investors, we cannot conclude
that value stocks in our selection of emerging markets have higher downside risk than growth
stocks. More accurate risk measures for downside risk are called for and could have been
useful in further investigating the issue. Value at Risk is one such measure. However, it is
unfortunately mostly applicable for sets of data that have normal or close to normal
distributions. Emerging markets returns, as is commonly known, are notorious for their non-
normal distributions. Thus, the applicability of this measure for our sample is somewhat
limited, and seems also not to be commonly applied in other research. Nevertheless, other
measures of downside risk would be useful in further investigating the riskiness of value and
growth investing strategies. One such measure is downmarket correlation and the findings of
this study with this measure will be discussed shortly.
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 59/98
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 60/98
60
Correlation
Correlations of emerging market returns are generally low (Zimmermann et al., 2003).
Perhaps exactly due to this low correlation between emerging markets, a lot of their volatility
disappears when they are combined in a portfolio. This finding points to the benefits of
investing in a diversified portfolio of emerging markets, rather than having a great deal of
exposure in one or a few markets. Let us review what happens to the correlations of these
returns in downmarkets when protection is most desirable.
As seen in chapter 5 pages 48-52, first of all, emerging market correlations in downmarkets
are higher than upmarket correlations. This finding is in alignment with Zimmermann et al.,
2003 who investigated international stock market correlations using a similar method. It is
generally the case that correlations increase in periods of high volatility. In terms of volatility,
it is the downside that concerns investors. This is an interesting but concerning finding for
investors as risks are higher exactly when protection would be needed, i.e. in high volatility
and downmarkets. Theoretically, this finding is difficult to explain, but has some interesting
implications for downside risk measures. From a behavioural finance point-of-view, which
will be looked at in more detail later, this finding may explain some of the observed
sensitivity to risk investors have: That losses are valued more greatly than gains.
It was also investigated whether downmarket correlations are higher for value or growth
portfolios. Interestingly enough, downmarket correlations of the value portfolio for all ratios
and both 30 and 50 percent portfolios, except price-to-cash and 50-percent portfolios, are
lower than downmarket correlations of growth portfolios. This would imply that value
strategy is less risky than growth strategy in downmarkets. It is an interesting finding as we
are interested in downside risk of value versus growth investing; yet such measures are
slightly tricky for emerging market returns, as they are non-normal. This measure shows that
value investing is the preferred strategy if one measures risk in terms of downmarket
correlation.
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 61/98
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 62/98
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 63/98
63
appealing, these risk measures do not seem to adequately capture the notion of risk in the real
world stock markets, as discussed above. So, traditional finance with their EMH thus fails to
explain the value premium sufficiently. Let us then look at further studies to see if value
stocks could nevertheless be riskier using other risk measures, and whether the value premium
could be explained this way or with investor irrationality as suggested by behavioural finance.
Lakonishok, Vishny, Shleifer and LaPorta (1997) show that growth stock prices decline and
value stock prices rise on earnings announcement dates. According to t-test, the finding is
highly significant (value of 5.65), time period is over 25 years and research is for the US
market. This cannot be explained by risk and the only possible way to explain it would be that
investors exactly at those days realise that these value stocks are less risky and have higher
earnings potential resulting in corrections in the market. This supports the behavioural finance
notions that investors are irrational in making initial evaluations about these companies.
Considering the rigorous methodology and type of study here, this evidence can be viewed as
quite definite.
Chen and Zhang (1998) argue that value stocks are indeed riskier, because they are often
stocks of financially distressed companies. Furthermore, Petkova and Zhang (2005) find that
value stocks when compared with growth stocks are riskier in bear markets. However, it isworth a mention that both of these studies focus on a short-term investment horizon and value
investing is a long-term approach. Nevertheless, value stocks could be more risky and
perform worse in certain markets when rating companies simply according to their market-to-
book or price-to-cash ratios for example as done in this paper and other research as well.
Often times, however, value investors also evaluate companies in other ways including an
evaluation of their cash-flows and financial strength, quality of management, long-term
business strategy and so on. Thus, in practise the risk to invest in financially distressedcompanies with the value approach is lower than simply looking at a few ratios as investment
criteria would imply it to be.
If a value premium were nevertheless a compensation for risk and thus a risk premium, and as
according to Fama & French (1998) a compensation for financial distress, then it would likely
change over time, be somewhat predictable and depend on economic conditions as well as
market sentiment. Zimmermann et al. (2003) among others, argue that the value premium
does correspond to economic cycles. In this fashion, value stocks seem to outperform growth
stocks in good economic conditions and vice versa. In this study, with 30 and 50 percent
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 64/98
64
sorting ratio and market-to-book value, the value premium disappears in 2001, 2006-2008 and
2010-2011. These years do correspond to economic downturns and would thus imply that in
downturns value investing generates more negative returns than growth investing. However,
looking at our risk measure standard deviation, with 30 percent portfolios, growth stocks have
higher standard deviations in the downturns of 2002 and 2007-2008 as seen in figures 10 and
11 on page 46. Thus, even though the value premium disappears during these downturns, the
standard deviations of value stocks are at lowest points in those years, whereas the standard
deviations of growth stocks increase. This shows that with this risk measure growth stocks
become more risky at downturns and value stocks less risky. We have already highlighted the
limitations of using standard deviation. When using downmarket correlation as a downside
risk measure, value portfolios have lower correlation than growth portfolios in downturns
(with all portfolios except price-to-cash and 30 percent portfolios). This also implies that a
value strategy is less risky relative to a growth strategy in downmarkets. Whether other
measures of risk that capture the notion of financial distress would give more enlightening
results remains to be answered.
Even though performance of value and growth strategies in downturns is interesting, it is not
the focus of this study. Either way, considering the positive outlook of the emerging markets
relative to that of the developed world, broadly speaking this argument does not dispute thenotion of value investing in a diversified portfolio of emerging market stocks with a buy and
hold strategy. It merely sheds light on the option of investigating performance of value and
growth strategies in downturns and their relative riskiness and the possibility of active
portfolio strategies with a combination of value and growth stocks: Where value stocks would
be shorted when economic conditions worsen and growth stocks would be bought, and vice
versa (if the investor believes in value stocks generating lower returns in economic
downturns). This will not be looked at in more detail, though it is an interesting area of research, especially for those interested in international stock markets, drivers of risk for
different investment strategies and active portfolio management.
Turning to more evidence on risk, Cooper, Gulen and Schill (2008) find that those firms that
have the lowest asset growth sorted by the lowest 10 percent asset expansion have 18 percent
yearly returns, versus the 10 percent highest asset growth companies with 5 percent annual
returns in the period 1968 to 2003. Interestingly, during this period, the growth stocks also
underperform Tresury Bills, as the risk free interest rate is 6.3 percent over a 35 year period.
This is indeed a puzzle, because according to the EMH, risk and return go hand in hand.
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 65/98
65
Growth stocks were certainly riskier than Tresury Bills at this time-period, and yet yield lower
returns, implying that risk does not explain adequately what goes on in the stock markets over
long time periods.
Liu and Wang (2010) study the long-term (up to 30 years between 1975 and 2007) risk and
return characteristics of value and growth stocks in Scandinavia, Europe and Asia. They find
that in all markets, risks of value stocks are lower than risks of growth stocks. Using Value at
Risk, they define risk as only downside risk, which as highlighted in the previous section, is
more relevant for investors who do not worry about upside potential. Also interestingly, in
contradiction with the notion that risk and return go hand in hand, they find that as the
investment horizon increases, the Scandinavian market has the lowest risk and highest return
for both value and growth indexes when compared with the European and Asian markets.
What is especially interesting for an investor investing in the emerging markets is liquidity.
Could it then be that growth stocks are generally more liquid than value stocks and thus, the
value premium compensates for this difference in much desired liquidity? After all, if there is
not enough liquidity in the market for certain types of stocks this makes them more risky as it
limits the opportunities for selling and buying. Rouwenhorst (1999) examines the cross-
sectional relationship between emerging market returns and liquidity with a sample of 1705firms in 20 emerging markets between 1982 and 1997 and finds no relationship. In other
words, the value premium could also not be explained by differences in liquidity between
growth and value stocks.
Thus we can conclude that risk and return do not always go hand-in-hand and risk does not
explain stock market returns over the long-term, no matter whether it is beta, standard
deviation or correlation that is used as the measure. Also, there is little evidence that valuestocks are more risky, at least based on conventional measures of systematic risk. It is more
likely that value stock under pricing is due to their risk and return characteristics for
behavioural reasons, broadly defined as investor irrationality.
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 66/98
66
Chapter 7: Perspectives
In order to get a better idea of the changes that are taking place in the emerging markets as
well as a view of profit opportunities from a value investor perspective, this final section will
address the fourth sub-question. The structural and demographic changes taking place in the
emerging markets are illustrated with some figures and examples to make it easier for the
reader to grasp what the enormous changes and growth in these markets means in practise.
Further, a few examples will be given of where value could currently be found in these
markets from the perspective of a value investor.
Can the emerging markets drive the global economy out of doom?
As seen in chapter 3 pages 14 to 20, the emerging markets have indeed shown increasing
growth and decreasing risk especially in recent times. Considering the current state of many
Western economies especially in the EU as well as the US, the question then becomes
whether this growth in the emerging markets could help drive the global economy out of the
doom.
The question of whether the emerging world can pull the rest of the world out of the economic
crisis is questionable, as several of these regions, especially Asia, are becoming more andmore self-sufficient as shown in the following. Let us first look into the demographic changes
taking place. Consumption power is increasing at a rapid pace in the emerging markets
creating what many view as the buzz that is felt in several emerging cities. As seen in figure
16, approximately 125 million households will enter the middle class between 2010 and 2015,
in other words about 50 households join the middle class every minute. This represents an
increase of more than 70 percent and is incredibly significant, because once a household joins
the middle class their consumption power increases to a level where they can make
investments in areas such as electrical and household appliances, education, consumer goods
and holidays, and other services as seen in figure 17. This could be beneficial for Western
companies that have a large proportion of their exports going into these nations. BMW for
example, could benefit from the increasing demand for automobiles in the emerging markets,
both standard and luxury ones. As much as these trends increase export sales potential and
thus are a positive influence on the West, such companies also exist in the emerging markets
and have the benefit of superior local market knowledge. They do lack experience and brand
power, however, and this is where the advantage is with companies like BMW.
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 67/98
67
Figure 16: Number of households entering the middle class in Emerging markets
Source: Jin et al., 2010
Figure 17: Consumption patterns change radically as middle-class population grows
Source: Jin et al., 2010
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 68/98
68
When thinking about Asia and especially China, what many Westerners do not seem to grasp
is exactly how self-sufficient and independent of Western companies the area is. This is
illustrated well by the vast and increasing amount of intra-Asian economic activity happening
in the region. When looking at the amount of shipping that takes place within Asia versus
between Asia and the United States or Asia and Europe, for example, the activity within Asia
is far greater with China playing a huge role. This is shown below in figure 18 where it can be
seen how most of the activity taking place in Asian ports is shipping within the Asian region.
China is the world’s number one consumer in bikes and motorcycles, shoes, automobiles,
mobile phones and luxury goods and number two in home appliances, consumer electronics,
jewellery and internet use. Therefore, the term ‘emerging market’ is actually somewhat
misleading, at least in these areas, although China is behind the West in export trade. China’s
main traditional energy source is still coal and demand for imported oil is so strong it is
considered a driver in oil prices. The import for food products is also high. China does not
have such an advanced pharmaceutical and health care as the West. (Stalk & Michael, 2011)
Although one must take notice that their approach to healthcare is also very different to
Western medicine and probably considered far behind due to vast differences. In higher
education, foreign universities still play a big role. On the other hand, Chinese companies are
world leaders in wind-turbine and solar panels, high speed trains and electronic-transmissionequipment. The rate of adoption of new technologies is higher than in other developing
countries, with exceptionally fast rate at which people are getting connected to the internet
and adopting mobile telephony. (Stalk & Michael, 2011)
Figure 18: Activity in Asian ports with Asia and the rest of the world
Source: Stalk & Michael, 2011
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 69/98
69
The idea that most of this economic activity and consumption takes place in Shanghai or
Beijing could also not be more wrong. Smaller cities in what used to be rural areas are
growing at a rapid pace. China has around 90 cities with a population higher than 250, 000
and by 2020 it is projected to have 400 such cities, 50 of which will have more than one
billion inhabitants. (Stalk & Michael, 2011) These are huge numbers and massive increases.
As seen in figure 17 depicting population movement into the middle-class, the disposable
income of residents in these cities is also likely to be higher than the average disposable
income of consumers in Shanghai or Beijing today.
In light of the above, for the West to rely on these countries to drag itself out of doom would
be rather naïve. It is possible that further increases in trade and co-operation, as well as further
opening of for example the Chinese economy can be beneficial for the West. Not to mention
the increasing purchasing power in these regions due to expansion of cities and movements
into the middle-class. But wherever there is opportunity, there is also a threat. And
considering the vast independence and growth of these regions with the example of China and
greater Asia above, these trends are undeniable. Innovation and openness to change cannot be
ignored and with the blurring of country boundaries and availability of information,
consumers will be able to choose from a wide array of options available to them. Thus, the old
saying, watch out for your neighbour, may now mean a distant neighbour continent.
Where in the emerging markets can value be currently found?
Considering the abovementioned growth, construction and movement into the middle-class
taking place in emerging markets, especially China, the question for an investor then becomes
how to benefit from these trends. There are infinite possibilities, but let us for a moment
return to the beginning of the paper and chapter 3 pages 16-18 where we made the analysis
that GDP growth does not necessarily mean higher return on equity. (Dimson et al., 2010)
With the example of China we highlighted that although the Chinese economy has developed
tremendously over the past years, as described in the previous section in great detail, its equity
markets lag behind. Indeed, the observation that GDP growth does not imply profitable
companies and shareholder returns is relevant. Another emerging region, namely Latin
America, on the other hand, has a great deal of profitable companies, considered very worthy
of investment. Furthermore, the region is rich is commodities. (Marr & Reynard, 2009).
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 70/98
70
Let us explore this further and consider how one could benefit from the massive expansion of
cities and construction taking place in China by investing in construction materials, for
example Copper. This takes us to the Western shores of Latin America, to a country called
Chile. This country is in my view perhaps the most neglected emerging market with
exceptional opportunities also for value investors. Chile is a global leader in producing
minerals and its industry is largely weighted with utilities, resources and basic industry. The
vast mining industry in Chile is a real asset to the economy and the country is the largest
copper producer in the world. (Investopedia ULC, 2011) As seen below in figure 19, 55
percent of its exports are copper.
Chile is the most competitive nation and has the most advanced financial system in Latin
America. It is also a leader in human development, income per capita, economic freedom and
low corruption, even though inequality is a major issue. Free market policies and a low
probability for civil disorder are also factors that make Chile a top emerging market
investment target. When looking at figure 19 below, it is evident that Chile has a healthy
fiscal balance and the lowest government debt of all countries in Latin America. It has also
performed well in the current global economic crisis and holds a credit rating of A+ (The
Global Competitiveness Report 2010-2011).
Figure 19: Chilean exports in percentages
Source: Credit Suisse Global Research Report on Chile Economy, November 2011
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 71/98
71
Figure 20: Fiscal balance and gross government debt of Latin American countries in 2010
Source: Credit Suisse Trends, 2011
Considering the large and increasing amount of investment in infrastructure building in the
emerging markets, especially China, Chile is in a very beneficial position to benefit from the
need for copper wiring and other building purposes, which are very likely to continue
increasing the price and demand for Copper. In May 2011, copper exports were 51 percent
higher than in May 2010 with shipments of US$ 4.149 billion. In 2011, from January to May,
the value of copper sales was US$ 18.648. This is an increase of 23.1 percent compared with
the figure a year earlier (ChileiT, 2010). The price of copper, as well as many other
commodities, has been increasing steadily for more than ten years with a large dip and pick-
up in December 2008. In figure 21, it can be seen that in a more short-term, the trend for price
of copper has nevertheless been downward, making it a good investment currently as it is notat a peak, yet still likely to increase in value over the long-term.
Figure 22 shows which commodities are at the moment perceived as under- and overvalued
by Credit Suisse FX research. Other interesting undervalued ones that show long-term
potential for increases include Nickel, Platinum, Palladium and Gold. After all, for a value
investor, the most important questions to ask when considering which industries, commodities
or markets to invest in would probably be along these lines. Is it relatively cheap and has it
been underperforming over the past year?
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 72/98
72
Figure 21: The price of copper between December 2010 and December 2011
Source: LME Copper price graph, 2011
Figure 22: Currently under- and overvalued Commodities, December 2011
Source: The year 2012 is likely to be challenging but there are still opportunities, 2011
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 73/98
73
Conclusion
Value investing is a long standing investment approach that has been alive since it was
introduced in the Security Analysis in 1934 by Benjamin Graham and David Dodd. It has
since been highly profitable for many investors, the most notable of whom is Warren Buffet.
What makes the approach so appealing is the safety it creates for the investor, as a stock is
purchased only if it is trading far below its intrinsic value calculated by DCF and certain
ratios, such as market-to-book, price-to-cash and dividend yield, but also including an
analysis of the company’s industry, its management and at which part of the profit cycle the
company currently. And whether this combination shows the company is undervalued by the
market and is likely to increase in price in the future, viewed with a long-term perspective.
The value premium is by now an established finding in stock markets across the globe,
including both developed and emerging markets. Value investing is an especially interesting
investing strategy in the emerging markets as it has been shown that high GDP growth, which
is the reason great many investors invest in these regions, does not actually generate higher
returns than low GDP growth, rather vice versa. Therefore, investment approaches other than
growth investing can create superior investment returns also in these regions.
When investigating whether there is a value premium in 12 selected emerging markets
between 2001 and 2011, we use market-to-book and price-to-cash ratios when sorting stocks
into value and growth portfolios, as well as equal country weights. Value premiums of 7.345,
10.315 and 141.854 are found for the 50, 30 and 10 percent portfolios with market-to-book
ratio as a sorting variable. Whereas value premiums of 9.330, 13.549 and 46.707 percent for
the 50, 30 and 10 percent portfolios are found with price-to-cash ratio as a sorting variable.
When looking at standard risk measures, such as standard deviation and beta; with our data, it
does seem that value stocks are riskier than growth stocks. But using correlations, we observe
that value investing is a safer strategy in downmarkets with lower correlations among country
returns than those found with the growth strategy. When we look at the actual applicability
and usability of standard risk measures such as standard deviation and beta in practice, we
find that standard deviation does not differentiate between upside and downside potential.
And that our value portfolios seem to have more upside potential than the growth portfolios.
Furthermore, betas have not been sufficient in explaining stock markets risk in practice,
although the CAPM seems appealing from a theoretical point-of-view. Therefore, traditional
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 74/98
74
finance with its standard risk measures and rigid assumptions about market efficiency seems
insufficient in explaining the value premium found in most stock markets in the world.
Behavioural finance, on the other hand, offers some rather interesting insights. When
investors are bombarded with a great deal of information through news, media and analyst
commentary, they tend to make short-cuts in decision making. Thus often buying into investor
hype and purchasing securities often at high prices and without making a proper analysis of
the company. Considering losses are valued more highly than gains, as suggested by the
prospect theory, investors are especially cautious when it comes to investing in companies
that have low valuations and operate in fields with old technologies and are left unnoticed by
the mass media. Such companies, however, can be interesting for the value investor precisely
for the reason that they are underestimated by the majority. Thus, there exist mispricing in the
markets due to human cognitive biases and irrational decision making, which a value investor
can take advantage of through industry and company analysis including quantitative and
qualitative factors. Then investing at a discount for the long-term and waiting for the rest of
the investor community to catch-up, hopefully resulting in price increases and profits.
A study by Lakonishok, Vishny, Schleifer and LaPorta (1997) shows that value stock prices
rise on earnings announcement dates with a highly significant result. It is especiallyinteresting as the only reasonable explanation is that investors realise exactly on those dates
that value stocks are less risky and have higher earnings potential, thus resulting in corrections
in the market. Furthermore, Cooper, Gulen and Schill (2008) find that high asset growth
companies with a 5 percent annual return underperform Treasury Bills with a 6.3 percent risk-
free interest rate in the period 1968 to 2003. This is a puzzle for those who believe in efficient
markets and that risk and return go hand in hand. It thus gives further support for the
behavioural financiers who see that market anomalies are indeed a reality.
With these thoughts in mind, it becomes interesting to look at where these bargains can be
found today? Well, considering that the emerging markets are our target, this is where we
look. And the first things that come to mind are the huge growth and demographic changes
taking place in China. With a deeper look, it is the construction industry among others that are
benefiting from these shifts and especially the expansion of cities taking place over there.
What materials does the construction industry use and where in the world do these materials
come from? Naturally, there are many, but copper from Chile is currently an interesting
target. Not only because of the economically stable, yet underestimated host country, but also
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 75/98
75
because this material seems currently underpriced. Whether to invest directly into
commodities, or find companies that are in a beneficial position to benefit from these trends is
a choice to be made and investing in both should be profitable, though in different ways. Of
course investing in China is also not a bad deal, but considering the more advanced and open
state of Latin American stock markets, perhaps this can wait. Either way, it is something to be
explored in another thesis, perhaps even a book.
With these words I would like to thank the reader for taking the time to read this material. I
hope it offered some interesting insights and inspired further thoughts and research.
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 76/98
76
References
Barberis, N. & Thaler, R. 2003, "Chapter 18 A survey of behavioral finance" in Handbook of
the Economics of Finance, ed. M.H.a.R.M.S. G.M. Constantinides, Elsevier, , pp. 1053-
1128.
Base, S. 1977, "Investment Performance of Common Stocks in Relation to their Price-
Earnings Ratios: a Test of the Efficient Market Hypothesis", Journal of Finance, vol.
32, no. 3, pp. 663-682.
Bird, R. & Whitaker, J. 2003, "The performance of value and momentum investment
portfolios: Recent experience in the major European markets", Journal of Asset
Management, vol. 4, no. 4, pp. 221-246.
Brealey, R., Myers, S. C., & Allen, F. 2006, Corporate Finance, 8th edition edn, McGraw-
Hill/Irwin, New York.
Cai, J. 1997, "Glamour and Value Strategies on the Tokyo Stock Exchange", Journal of
Business Finance & Accounting, vol. 24, no. 9, pp. 1291-1310.
Chan, L.K.C., Hamao, Y. & Lakonishok, J. 1991, "Fundamentals and Stock Returns inJapan", Journal of Finance, vol. 46, no. 5, pp. 1739-1764.
Chen, N. & Zhang, F. 1998, "Risk and Return of Value Stocks", The Journal of Business, vol.
71, no. 4, pp. 501-535.
Cooper, M.J., Gulen, H. & Schill, M.J. 2008, “Asset Growth and the Cross-Section of Stock
Returns”, The Journal of Finance, vol. 63, no. 4, pp. 1609-1651.
Country Indebtness An Update. 2011. Credit Suisse Group AG. [ONLINE] Available at:
https://infocus.credit-
suisse.com/data/_product_documents/_shop/298133/csri_indebtedness.pdf. [Accessed
21 December 11].
Credit Suisse AG, 2011, Global Research Report on Chile Economy. Credit Suisse Group
AG, Zurich, Switzerland.
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 77/98
77
Davis, J.L., Fama, E.F. & French, K.R. 2000, "Characteristics, Covariances, and Average
Returns: 1929 to 1997", Journal of Finance, vol. 55, no. 1, pp. 389-406.
De Bondt, Werner F. M. & Thaler, R.H. 1985, "Does the Stock Market Overreact?", Journal
of Finance, vol. 40, no. 3, pp. 793-805.
De Bondt, Werner F.M. & Thaler, R.H. 1987, "Further Evidence on Investor Overreaction
and Stock Market Seasonality", Journal of Finance, vol. 42, no. 3, pp. 557-581.
De Long et al. 1990, “Noise Trader Risk in Financial Markets”, Journal of Political Economy,
1990, vol. 98, no. 4, pp. 703-738.
Dimson E., Marsh P.R., Staunton M., and Wilmot J.J. 2009, Credit Suisse Global Investment Returns Yearbook 2009, Credit Suisse Group AG, Zurich, Switzerland.
Dimson E., Marsh P.R., Staunton M., and Wilmot J.J. 2010, Credit Suisse Global Investment
Returns Yearbook 2010, Credit Suisse Group AG, Zurich, Switzerland.
Dimson, E., Nagel, S., Quigley, G. 2003, "Capturing the Value Premium in the United
Kingdom", Financial Analysts Journal, vol. 59, no. 6, pp. 35-45.
Drew, M.E. & Veeraraghavan, M. 2002, "A Closer Look at the Size and Value Premium in
Emerging Markets: Evidence from the Kuala Lumpur Stock Exchange", Asian
Economic Journal, vol. 16, no. 4, pp. 337-351.
Elton, E.J., Gruber, M.J., Brown, S.J. & Goetzmann, W.N. 2003, Modern Portfolio Theory
and Investment Analysis. John Wiley & Sons.
Fama, E.F. & French, K.R. 2006, "The Value Premium and the CAPM", Journal of Finance,vol. 61, no. 5, pp. 2163-2185.
Fama, E.F. & French, K.R. 1998, "Value versus Growth: The International Evidence",
Journal of Finance, vol. 53, no. 6, pp. 1975-1999.
Fama, E.F. & French, K.R. 1992, “The Cross-Section of Expected Stock Returns”, Journal of
Finance, vol. 47, no. 2, pp. 427-465.
Global Economic Research, 2011. Emerging Markets – a differentiated view, Credit Suisse
Group AG, Zurich, Switzerland.
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 78/98
78
Graham, B. 2005 (1949), The intelligent investor The classic text on value investing,
HarperBusiness, New York.
Graham, B. & Dodd, D. 1934, Security Analysis, McGraw-Hill Publishing.
Hameed, A., and Ting, S. (2000), “Trading volume and short-horizon contrarian profits:
Evidence from Malaysian stock market,” Pacific-basin finance Journal , 8, pp.67-84
Herrmann, T., Wassermann, N., and Von Liechtenstein, A. 2011, 18.01.2011-last update ,
Emerging Markets in 2011: Booming With Some Risks [Homepage of Credit Suisse
Group AG], [Online]. Available: https://infocus.credit-
suisse.com/app/article/index.cfm?fuseaction=OpenArticle&aoid=297391&lang=EN
[2011, 03/16].
Jegadeesh, N., and Titman, S (1993).,”Return to buy winners and selling losers: Implications
for stock market efficiency,” Journal of Finance, 48, 1, pp.65-91.
Jin et al. 2010. Winning in Emerging-Market Cities, A Guide to the World's Largest Growth
Opportunity. [ONLINE] Available at: http://www.bcg.com/documents/file60078.pdf.
[Accessed 21 December 11].
Joshipura, M. 2010, "Does the stock market overreact? Empirical evidence of contrarian
returns from indian markets", Review of Business Research, vol. 10, no. 4.
Kahneman, D. & Tversky, A. 1979, "Prospect Theory: an Analysis of Decision Under Risk",
Econometrica, vol. 47, no. 2, pp. 263-291.
Kang, J., Liu, M.H., and Ni, S. X.(2002), “Contrarian and momentum strategies in the China
stock market: 1993-2000.” Pacific-Basin finance Journal , 10, pp.243-265
La Porta, R., Lakonishok, J., Shleifer, A. & Vishny, R. 1997, "Good News for Value Stocks:
Further Evidence on Market Efficiency", Journal of Finance, vol. 52, no. 2, pp. 859-
874.
Lakonishok, J., Shleifer, A. & Vishny, R.W. 1994, "Contrarian Investment, Extrapolation, and
Risk", Journal of Finance, vol. 49, no. 5, pp. 1541-1578.
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 79/98
79
Liu, Z. & Wang, J. 2010, "Value, Growth, and Style Rotation Strategies in the Long Run",
Journal of Financial Service Professionals, vol. 64, no. 6, pp. 66-74.
LME Copper price graph. 2001, The London Metal Exchange Limited 2003 – 2011.
[ONLINE] Available at: http://www.lme.com/copper_graphs.asp.[Accessed 21
December 11]
Look To Chile in 2011. 2011, Investopedia ULC. [ONLINE] Available at:
http://stocks.investopedia.com/stock-analysis/2010/Look-to-Chile-In-2011-CH-ENI-
LFL-SAN1229.aspx#axzz0DozXPqHE. [Accessed 21 December 11].
Petkova, R. & Zhang, L. 2005, "Is value riskier than growth?", Journal of Financial
Economics, vol. 78, no. 1, pp. 187-202.
Reynard, C. & Marr, J. 2010, Investing in Emerging Markets, The BRIC Economies and
Beyond, Wiley, Chichester.
Risager, O. 2009, Investing in Value Stocks, McGraw-Hill, London.
Rouwenhorst, K.G. 1999, "Local Return Factors and Turnover in Emerging Stock Markets",
Journal of Finance, vol. 54, no. 4, pp. 1439-1464.
Shleifer, A. 2000, Inefficient Markets: An Introduction to Behavioral Finance, Oxford
University Press, Oxford.
Stalk, G. & Michael, D. 2011. Harvard Business Review. [ONLINE] Available at:
http://hbr.org/2011/06/what-the-west-doesnt-get-about-china/ar/1. [Accessed 21
December 11].
Thaler, R. & Barberis, N. 2002, A Survey of Behavioral Finance, National Bureau of
Economic Research, Cambridge, Mass.
Thaler, R.H. 1999, "Mental Accounting Matters", Journal of Behavioral Decision Making,
vol. 12, no. 3, pp. 183-206.
Thaler, R.H., Tversky, A., Kahneman, D. & Schwartz, A. 1997, "The Effect of Myopia and
Loss Aversion on Risk Taking: an Experimental Test", Quarterly Journal of Economics,
vol. 112, no. 2, pp. 647-661.
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 80/98
80
The year 2012 is likely to be challenging but there are still opportunities. 2011. Credit Suisse
Group AG, Fund Lab. [ONLINE] Available at: https://fundlab.credit-
suisse.com/researchData/F111206000079.pdf. [Accessed 21 December 11].
The Global Competitiveness Report 2010-2011. 2011. World Economic Forum. [ONLINE]
Available at:
http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2010-11.pdf.
[Accessed 21 December 11].
The Way Forward: Measuring the Impact of Short-Term and Structural Growth Drivers on
Emerging Market Investing. 2011. Credit Suisse Group AG. [ONLINE] Available at:
https://www.credit-
suisse.com/asset_management/doc/thought_leadership/201110_emerging_markets_whit
e_paper.pdf. [Accessed 21 December 11].
Trends 2011. 2011. Credit Suisse Group AG. [ONLINE] Available at:https://www.credit-
suisse.com/ch/investment_services/en/financial_service_providers/publications/index.js
p. [Accessed 21 December 11].
Tsay, R.S. 2005, Analysis of financial time series, Wiley, Hoboken N.J.
Tversky, A. & Kahneman, D. 1981, "The Framing of Decisions and the Psychology of
Choice", Science, vol. 211, no. 4481, pp. 453-58.
Value of copper exports grows 51 percent in May over a year earlier. 2010, ChileiT.
[ONLINE] Available at: http://www.chile-it.cl/news-item/value-copper-exports-grows-
51-percent-may-over-a-year-earlier. [Accessed 21 December 11]
Wakker, P.P., S. & Kahneman, D. "Back to Bentham? Explorations of Experienced Utility",
The Quarterly Journal of Economics, 1997, vol. 112; Vol.112, no. 2; 2, pp. 375; 375-
406; 406.
Wärneryd, K. 2001, Stock-market psychology, how people value and trade stocks, Edward
Elgar Publishing Limited, Cheltenham.
Zimmermann, H., Drobetz, W., & Oertmann, P. 2003, Global Asset Allocation. John Wiley &
Sons, Inc., Hoboken, New Jersey.
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 81/98
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 82/98
82
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 83/98
83
Appendix 2: Value and growth returns with market‐to‐book ratio
50 percent portfolios
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 84/98
84
30 percent portfolios
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 85/98
85
10 percent portfolios
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 86/98
86
Appendix 3: Value and growth returns with price‐to‐cash ratio
50 percent portfolios
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 87/98
87
30 percent portfolios
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 88/98
88
10 percent portfolios
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 89/98
89
Appendix 4: Individual country returns
Country Value Growth Difference Difference in %
Brazil 0.0290 0.0271 0.0019 0.188%Chile 0.0337 0.0180 0.0157 1.572%
China 0.0146 0.0145 0.0001 0.008%
India 0.0408 0.0202 0.0206 2.056%
Indonesia 0.0219 0.0304 -0.0084 -0.844%
Malaysia 0.0235 0.0183 0.0052 0.519%
Mexico 0.0398 0.0250 0.0148 1.483%
Philippines 0.0309 0.0109 0.0200 1.999%
Poland 0.0200 0.0291 -0.0091 -0.909%
South Africa 0.0202 0.0174 0.0029 0.285%
Taiwan 0.0235 0.0134 0.0101 1.014%
Turkey 0.0272 0.0275 -0.0003 -0.031%
Monthly country specific value and growth portfolio average returns and the value
premium with market-to-book ratio and 50% sorting percentage
Country Value Growth Difference Difference in %
Brazil 0.0337 0.0294 0.0043 0.432%
Chile 0.0001 0.0220 -0.0219 -2.193%
China 0.0208 0.0188 0.0020 0.205%
India 0.0559 0.0183 0.0375 3.754%
Indonesia 0.0542 0.0365 0.0177 1.772%
Malaysia 0.0298 0.0169 0.0129 1.287%
Mexico 0.0060 0.0172 -0.0112 -1.116%
Philippines 0.0464 0.0150 0.0314 3.144%
Poland 0.0200 0.0473 -0.0273 -2.731%
South Africa 0.0326 0.0169 0.0157 1.574%
Taiwan 0.0476 0.0149 0.0327 3.271%
Turkey 0.0472 0.0401 0.0071 0.709%
Monthly country specific value and growth portfolio average returns and the value
premium with market-to-book ratio and 30% sorting percentage
Country Value Growth Difference Difference in %
Brazil 0.1225 0.6056 -0.4831 -48.309%
Chile 0.2942 0.0688 0.2254 22.544%
China 0.0390 0.0267 0.0122 1.225%
India 0.0802 0.0274 0.0528 5.284%
Indonesia 0.0891 0.0442 0.0449 4.487%
Malaysia 0.0732 0.0171 0.0560 5.605%
Mexico 1.5756 0.0985 1.4770 147.704%
Philippines 0.1134 0.0219 0.0915 9.147%
Poland 0.1545 0.1436 0.0109 1.089%
South Africa 0.1201 0.0194 0.1007 10.069%Taiwan 0.0991 0.0171 0.0820 8.201%
Turkey 0.0596 0.2806 -0.2209 -22.091%
Monthly country specific value and growth portfolio average returns and the value
premium with market-to-book ratio and 10% sorting percentage
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 90/98
90
Country Value Growth Difference Difference in %
Brazil 0.0224 0.0209 0.0015 0.147%Chile 0.0230 0.0145 0.0086 0.857%
China 0.0147 0.0145 0.0002 0.025%
India 0.0430 0.0195 0.0235 2.345%
Indonesia 0.0381 0.0298 0.0083 0.826%
Malaysia 0.0217 0.0187 0.0030 0.297%
Mexico 0.0290 0.0188 0.0102 1.023%
Philippines 0.0288 0.0121 0.0168 1.676%
Poland 0.0346 0.0304 0.0043 0.427%
South Africa 0.0246 0.0194 0.0053 0.527%
Taiwan 0.0250 0.0117 0.0133 1.327%
Turkey 0.0350 0.0365 -0.0015 -0.150%
Monthly country specific value and growth portfolio average returns and the value
premium with price-to-cash ratio and 50% sorting percentage
Country Value Growth Difference Difference in %
Brazil 0.0289 0.0105 0.0185 1.847%
Chile 0.0333 0.0211 0.0122 1.218%
China 0.0183 0.0176 0.0007 0.072%
India 0.0399 0.0176 0.0222 2.224%
Indonesia 0.0412 0.0348 0.0064 0.644%
Malaysia 0.0335 0.0221 0.0114 1.142%
Mexico 0.0163 0.0234 -0.0071 -0.711%
Philippines 0.0449 0.0162 0.0287 2.868%
Poland 0.0342 0.0551 -0.0209 -2.093%
South Africa 0.0523 0.0362 0.0161 1.608%
Taiwan 0.0363 0.0215 0.0149 1.487%
Turkey 0.0510 0.0181 0.0329 3.287%
Monthly country specific value and growth portfolio average returns and the value
premium with price-to-cash ratio and 30% sorting percentage
Country Value Growth Difference Difference in %
Brazil 0.1147 0.0966 0.0182 1.817%
Chile 0.1705 0.0445 0.1260 12.598%
China 0.0185 0.0190 -0.0006 -0.056%
India 0.0997 0.0645 0.0352 3.519%
Indonesia 0.1342 0.3256 -0.1914 -19.142%
Malaysia 0.0501 0.0745 -0.0245 -2.446%
Mexico 0.2803 0.0248 0.2555 25.549%
Philippines 0.1681 0.0323 0.1357 13.573%
Poland 0.1516 0.1144 0.0372 3.722%
South Africa 0.1384 0.1705 -0.0320 -3.203%Taiwan 0.0476 0.0604 -0.0128 -1.277%
Turkey 0.3429 0.2185 0.1243 12.434%
Monthly country specific value and growth portfolio average returns and the value
premium with price-to-cash ratio and 10% sorting percentage
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 91/98
91
Appendix 5: Individual country returns with 50 percent portfolios
Market‐to‐book ratio
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 92/98
92
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 93/98
93
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 94/98
94
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 95/98
95
Appendix 6: Individual country returns with 50 percent portfolios
Price‐to‐cash ratio
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 96/98
96
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 97/98
97
7/29/2019 Value investing in emerging markets
http://slidepdf.com/reader/full/value-investing-in-emerging-markets 98/98