We found evidence that the value advantage in the emerging markets is still intact based on today's valuation spreads, which show a 55% discount of the cheapest quintile to the average for the emerging markets regional index. Our expectations for value outperformance in emerging markets going forward should be more in line with that experienced in developed markets, as opposed to twice the advantage realized historically, due to the spread convergence we discussed earlier. An added advantage, however, is the ability to access a universe of potentially higher growth companies in the emerging markets for valuations similar to those of developed markets.
More recent work reveals that not only does the value advantage exist in emerging markets, the advantage is actually greater there than in the developed world. In fact, excess returns based on low valuation in emerging markets are more than double those in developed markets over the last 22 years, as can be seen in Figure 1, below. In addition to the academic studies on returns, work has also been done with respect to risk in emerging market value investing. Among other studies, a study by Tinbergen Institute in the Netherlands (Jaap van der Hart, et.al.3) concluded there is "no evidence of higher market risk or lower liquidity for value strategies."
We set out to investigate why the value advantage has been greater in emerging markets. Back testing has proven that valuation metrics lead to greater outperformance when valuation spreads are wide, both within developed and developing markets. We postulated that broader spreads in emerging markets may be the source of the more substantial value effect in emerging markets.
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More recent work reveals that not only does the value advantage exist in emerging markets, the advantage is actually greater there than in the developed world. In fact, excess returns based on low valuation in emerging markets are more than double those in developed markets over the last 22 years, as can be seen in Figure 1, below. In addition to the academic studies on returns, work has also been done with respect to risk in emerging market value investing. Among other studies, a study by Tinbergen Institute in the Netherlands (Jaap van der Hart, et.al.3) concluded there is "no evidence of higher market risk or lower liquidity for value strategies."
We set out to investigate why the value advantage has been greater in emerging markets. Back testing has proven that valuation metrics lead to greater outperformance when valuation spreads are wide, both within developed and developing markets. We postulated that broader spreads in emerging markets may be the source of the more substantial value effect in emerging markets.
Read the complete commentary
