Abstract
There are indications that value investing strategies have been able to outperform the overall market in several countries across the globe. In this article, the specific case of South Korea is analyzed. It would appear that from a rigorous statistical point of view there are no strong evidence supporting the outperformance of value stocks versus growth stocks in South Korea, particularly when measured on a yearly basis. These results were consistent using both MSCI value and growth indexes as well as constructing portfolios using the P/E, P/B, cash flow per share and average 5-year sales growth. The statistical tests performed failed to reject for the majority of the years that the monthly returns come from distributions with different medians. The test yielding rather consistent results on a yearly basis but for large periods of time (decades) the results were more mixed, pointing in some cases to value investing outperforming over that very long time frame. It should be noted that the final value of the portfolios was rather different when using criteria, such as low P/E, typically associated with value stocks. The tests also failed to reject the hypothesis of different means for the monthly returns of small, medium and large companies.
Highlights
The idea that value investing in the long term outperforms other strategies, such as growth investment, is a widely held assumption by many institutional investors but the bulk on the research on this topic has focused on the U.S case which is a mature market of an enormous size compared to most other countries
The results obtained are mixed but overall point towards the direction of no value or small cap effect in the South Korean Equity market at least when performance is measured on a yearly basis
This result might be a bit counterintuitive as value effect has been detected in the stock markets of many countries and the final value of some of the simulated portfolios with some of the metrics typically associated with value investing appear to be rather different from the results obtained by broad indexes, such as KOSPI and KOSDAQ, as well as when using growth portfolios
Summary
The idea that value investing in the long term outperforms other strategies, such as growth investment, is a widely held assumption by many institutional investors but the bulk on the research on this topic has focused on the U.S case which is a mature market of an enormous size compared to most other countries. South Korea, as will be explained later in this article, is a rather unique country with features typically associated with developed countries, such as relatively high GDP per capita, to other features more common in emerging markets such as questionable corporate governance (Gupta 2014) associated with some of its largest family conglomerates These family conglomerates are commonly called using the Korean term chaebol and form the backbone of the Korean economy. The second objective is to determine if there is a small size effect present in the South Korean stock market As previously mentioned this would mean that companies with small market capitalization outperform in a statistically detectable manner. The null hypothesis is that such effect does not exist on the South Korean stock market This objective is important, as the previous one, in the context of investment decisions as for instance following a small capitalization strategy in a market where such effect does not exist might lead to unwanted results. It will be shown that the results obtained suing both methods are consistent and that the assumption that test cannot detect a statistically significant value or small size effect in the Korean market
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