And the Winner Is…A Comparison of Valuation Measures for Country Asset Allocation
Journal of Portfolio Management, Forthcoming
Posted: 11 Feb 2018 Last revised: 13 Feb 2019
Date Written: January 31, 2018
The authors evaluate and compare the usefulness of various valuation ratios for country selection. To this end, the performance of 73 national equity indices is investigated for the period 1996 to 2017. The EBITDA-to-EV multiple is the best predictor of performance and outperforms other metrics. An equal-weighted portfolio that is long (short) in the tertile of countries with the highest (lowest) EBITDA-to-EV ratio produces a mean monthly return of 0.69% and a Sharpe ratio of 0.81. These are more than double the Sharpe ratios obtained from using traditional metrics such as the book-to-market ratio or dividend yield. Two major drawbacks of inter-country value strategies are identified: 1) payoffs are derived predominantly from emerging and frontier markets and 2) profitability has significantly declined in the last decade.
Keywords: Value Investing, Valuation Ratios, EBITDA-to-EV Ratio, Enterprise Multiples, International Investments, Country-Level Equity Anomalies, Cross-Sectional Returns, Return Predictability, Exchange Traded Funds, ETFs
JEL Classification: G12, G15
Suggested Citation: Suggested Citation