Swedroe: Value-Factor For EMs

August 26, 2013

In emerging markets, the value effect exists for large-cap stocks too, Swedroe says.

There is a large body of evidence demonstrating the existence of the value and momentum premiums in the U.S. and other developed markets. To determine if these factors also existed in emerging markets, the authors of the paper “Size, Value, and Momentum in Emerging Market Stock Returns” studied the evidence from 18 countries covering the period 1990-2011.

The 18 countries were broken into three regions: (1) Asia (China, India, Indonesia, South Korea, Malaysia, Philippines, Taiwan and Thailand); (2) Latin America (Argentina, Brazil, Chile, Colombia and Mexico); and (3) Eastern Europe (Czech Republic, Hungary, Russia, Poland and Turkey).

The authors also add to the literature by looking to see if there are size patterns in the two factors. Following is a summary of their findings:

  • Both the value and momentum effects exist in emerging markets, providing further “out-of-sample” evidence.
  • For all three regions and for all emerging markets, the value premium is positive and statistically significant at the 5 percent level, as well as being economically significant. It’s also fairly similar across small and large stocks. This contrasts with the evidence in developed markets, where the value premium is larger in small stocks.
  • The momentum effect is meaningfully larger for small stocks. This is consistent with the findings for developed markets.
  • Consistent with the evidence in developed markets, returns associated with value and momentums are negatively correlated. The implication is that portfolios combining exposures to both factors will have higher Sharpe ratios—they will be more efficient.
  • The correlations of the factors across the region were positive, though low. This suggests that diversifying across regions provides further benefits. The emerging market value and momentum factors also have low correlation with the

Summarizing, this study adds to the considerable body of evidence on the benefits of incorporating value and momentum strategies into portfolios by confirming prior research on the factors that drive returns.

It also provides us with a new set of countries that can be taken as an out-of-sample test that validates previous studies. Moreover, the paper also confirms that country diversification helps investors capture the premiums, another result that has been around in the literature for quite a while.

Larry Swedroe is director of Research for the BAM Alliance, which is part of St. Louis-based Buckingham Asset Management.



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