Via Pzena Q3 letter to shareholders
The emerging markets have attracted considerable investor interest, both as a way to tap into large, rapidly growing economies and, more recently, as potentially a good place to and value as hyper-growth decelerates and stocks correct. As such, we felt this an opportune time to take a step back and offer a long-term perspective on value investing in the emerging markets. In this article we review the empirical evidence for the value advantage in the emerging markets, examine some of the reasons this advantage exists, present our research on whether there are observable value cycles in the emerging markets, and discuss where we currently stand.
The Value Advantage
Academic evidence of the global value advantage is well documented. Fama and French conducted the seminal re- search in this area, first in their 1992 article “The Cross-Section of Expected Stock Returns” which identified the value advantage in the U.S., followed by their 1998 article “Value versus Growth: The International Evidence.” Their 1998 work examined both developed and emerging markets, and found the value premium, defined as the return differential between low and high price-to-book stocks, was 7.68% per annum in developed markets and 16.91% in emerging markets. Other researchers confirmed Fama and French’s observation of the value advantage in emerging markets, including Rouwenhorst, Barry, Goldreyer, Lockwood and Rodriguez4, and, more recently, Marjo-Ritta Elisa Pitkanen who studied the period 2001 through 2011. Studies have also identi?ed a value advantage in individual countries as diverse as India, Malaysia and China.
We conducted our own research into the global value ad- vantage, examining the return difference between low price-to- book stocks and the broad market over the period 1988 through 2013. As can be seen in Figure 1, we were able to con?rm a value premium in both the developed and emerging markets, as well as the significantly higher premium for value stocks in emerging markets. Not unexpectedly, this premium has narrowed in more recent years as emerging markets become broader in country representation and market capitalization. Still the value advantage is substantial.