Value versus growth in the Asian equity markets
There has been considerable empirical research on style investment in the United States and a fair amount in Europe but relatively little published research in the Asian markets. It is commonly believed that fundamental stock valuation and style analysis works only in developed markets like the United States and that more qualitative methods should be used in inefficient markets such as Asia (including developed economies and emerging economies in Asia). We therefore determine whether style investment strategies can be applied consistently in the Asian Equity Markets. Our study encompasses markets in developed Asia which includes Japan, Hong Kong and Singapore as well as markets in emerging Asia comprising Indonesia, Korea, Malaysia, Philippines, Taiwan and Thailand. We also investigate the significance of the theoretical drivers behind the valuation ratios which are used as proxies for classifying value and growth stocks. The traditional valuation ratios, which are influenced by the 'Price' factor, may contain systematic errors and may not reflect the underlying intrinsic valuations of both value and growth' companies. This raises the question whether they are valid ratios for screening value and growth stocks. We therefore analyse a style investment strategy using a combination of theoretical drivers of the proxies based on historical data or a mix of historical and forecast data. We also investigate the reasons behind the existence of 'value-growth premiums'. We focus on elements of behavioural finance based on expectational error to explain the superior performance of value strategies. There may be many different sources of expectational error which range from investors and analysts extrapolating past earnings/sales growth too far into the future, to reliance on analysts' earnings forecasts, to portfolio flows or various cognitive errors/research biases. To date, there has not been a consensus on the sources of extreme expectations. Our thesis determines whether extreme expectations are driven by extrapolation of past performance, portfolio flows and/or analysts' forecast errors to explain the value/growth effect. The results of the thesis aim to provide a deeper understanding of style investment in the Asian Equity Markets and enable a fund manager to better implement active style strategies.