TIME REWARD OF VALUE INVESTING: EVIDENCE FROM THE SOUTHEAST ASIA STOCK MARKETS

Abstract

Purpose- This study tests the effectiveness of value investing and its relation to the length of investment horizon in Malaysia, Singapore, and Thailand stock markets as well as the ASEAN market as a whole. Two simple financial ratios, namely, Price-to-Earning (PE) ratio and Price-to-Book (PE) ratio, are employed to see if they represent value premium in a long-term investment. 

Methodology- A simulation methodology that randomly selects an investment date is applied which effectively eliminates market timing bias. Portfolios sorted by PE and PB ratios are formed on a randomly chosen date and held for different periods of time. Additionally, Fama-Mcbeth (1973) regression checks a robustness of value premium of PE and PB ratios.

Findings- Portfolios constructed with low PE and PB ratio generate higher returns and form efficient portfolios with better risk-return trade-off. In a long-term investment, PE and PB are indicators of value premium. Also, the ASEAN Link provides an excellent opportunity for international diversification.

Conclusion- Value investors are rewarded for holding portfolios with low PE and PB stocks for a long period of time. Furthermore, investors should construct portfolios with stocks from different markets to fully take advantage of international diversification, which significantly reduces investment risk.  

Keywords

• Value investing,long-term investment,international diversification,financial simulation,emerging markets

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