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

See all articles by Adam Zaremba

Adam Zaremba

Poznań University of Economics and Business; University of Dubai

Jan Szczygielski

University of Pretoria

Date Written: January 31, 2018

Abstract

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

Zaremba, Adam and Szczygielski, Jan, And the Winner Is…A Comparison of Valuation Measures for Country Asset Allocation (January 31, 2018). Journal of Portfolio Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3114803 or http://dx.doi.org/10.2139/ssrn.3114803

Adam Zaremba (Contact Author)

Poznań University of Economics and Business ( email )

al. Niepodległości 10
Poznań, 61-875
Poland

HOME PAGE: http://adamzaremba.pl

University of Dubai ( email )

Academic City
Dubai, 14143
United Arab Emirates

HOME PAGE: http://adamzaremba.pl/

Jan Szczygielski

University of Pretoria ( email )

Physical Address Economic and Management Sciences
Pretoria, Gauteng 0002
South Africa

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