Value vs. Glamour: Emerging Markets
Brandes Investment Partners
April 1, 2013
Brandes Institute Research Paper No. 2013-02
Abstract:
According to the International Monetary Fund, emerging markets now represent more than a third of global GDP — and are expected to grow at a faster rate than advanced economies. With such explosive growth, investors often assume that an investment strategy focused on growth would yield better results. Yet, the results from the Brandes Institute’s Value vs. Glamour: A Global Phenomenon study shows a strong evidence of a value premium in developing countries.
Value vs. Glamour: Emerging Markets – Introduction
Consistent with the methodology used in the study of developed countries, the sample for emerging markets excluded the smallest 50% of all companies to represent a more truly investable universe. Aft er the adjustment the smallest company in the sample had a market cap of $417 million. As shown in Exhibit 1, the sample size for this study increased signifi cantly over the last 15 years, coinciding with economic growth and greater database coverage of emerging market companies.
Each June 30, stocks were placed into ten groups, or deciles, based on their fundamentals. Value stocks, those with low price-to-book (P/B), price-to-cash fl ow (P/CF), and price-to-earnings (P/E), filled in the upper deciles, while their glamour counterparts, those stocks with high P/B, P/CF and P/E ratios, occupied the lower deciles.
Performance for each decile was tracked over the subsequent five years. Th is process was repeated every year to create a series of overlapping, 5-year rolling periods. Results were averaged across all rolling periods to compare the performance of value stocks and glamour stocks over the long term.
Th e entire process was repeated three times to measure results based on the three separate criteria. Results, as shown in Exhibit 2, show a strong value premium in emerging markets across metrics. For example, on a P/B basis, the average annualized 5-year return for glamour stocks in decile 1 was 4.6% versus 20.3% for value stocks in decile 10; an annualized value premium of 15.7%—more than double the premium found in non-U.S. developed markets.
Exhibit 3 illustrates the annualized relative performance of value stocks on a price-to-book basis, showing the persistence of the value premium over the majority of the rolling 5-year periods. We calculated relative performance by subtracting the annualized average 5-year return of stocks in decile 1 from the annualized average 5-year return of stocks in decile 10. In the few periods where glamour outperformed value, the difference exceeded 5% once, while value stocks outperformed by this amount 20 times during the study.
The value premium was also evident when comparing the MSCI Emerging Markets Growth and Value Indices. Although annual performance data for the indices only became available beginning in 1997, there is strong evidence of a value premium, with value stocks delivering an annualized outperformance of 1.96% over growth stocks. The outperformance was even more significant over the last 10 years; with value registering 3.52% annualized outperformance over growth.
Exhibit 4 shows the significant impact this outperformance can make on returns, even over a relatively short period.
We then examined the price volatility in emerging markets and found the standard deviation for emerging markets was higher than developed countries. However, as seen in Exhibit 6, our study revealed little difference between value and the growth deciles in emerging markets.
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