Go Global – Investing Around The World May 30, 2019

Go Global – Investing Around The World

Part 2. How?

We hope that we have convinced you to beat your home bias in our previous article.

So you want to invest in foreign markets now. But how?

In an effort to beat my own home bias, I visited Hanoi last week with a group of friends. It was the first time anyone of us went to Vietnam. None of us spoke Vietnamese so parts of the trip in the less touristy areas proved to be a challenge. Google translate was of little help when we can’t type Vietnamese into our phones.

When we venture into foreign lands, how do we plan our travel itinerary and conduct the trip?

In the same vein, when we venture into foreign markets, how do we conduct our stock picking?

We read and learn from established academics, practitioners and/or travel bloggers.
In all other situations, we adopted a universal language – point with our fingers.

So what are the universal signs driving local and foreign investment returns around the world? Among the many, we found two drivers.

In one of our previous articles, we have shown that the driver of your investment return is price paid relative to the value you are getting.

In another article, we covered market momentum and showed that rising prices tend to continue to rise and beat the market index.

Today, we retest our portfolios using common measures of value and short-term momentum and expand our coverage across various global markets.

Here are the results:

Value is (still) King

We used Price to Earnings (PE), Price to Book (PB), Price to Cash Flow (PCF) and Price to Sales (PS) as proxies of value for each of the major financial reports: Income Statement, Balance Sheet, Cash Flow Statement and Sales as a proxy of general profitability.

Ratio Measure Value from
Price to Earnings (PE) Income Statement
Price to Book Value (PB) Balance Sheet
Price to Operating Cash Flow (PCF) Cash Flow Statement
Price to Sales (PS) General Profitability

All our measures of value outperform its local index when applied consistently over a period of 10 years from 2009 to 2018.

The following table and chart illustrates the annualised returns of various stock picks done continually based on a single measure of value against their respective local indices.

United States 13.11% 20.78% 18.41% 19.92% 23.56%
Japan 10.43% 24.17% 25.52% 22.84% 26.88%
Hong Kong 9.80% 26.54% 21.69% 26.79% 24.29%
Singapore 9.17% 25.18% 24.43% 24.00% 29.82%
Indonesia 19.23% 51.06% 45.00% 43.38% 50.32%
Malaysia 10.36% 26.73% 23.46% 22.52% 17.16%
United Kingdom 8.55% 26.40% 18.35% 26.17% 17.61%
Thailand 17.41% 32.85% 28.47% 29.88% 30.62%
Vietnam 14.76% 69.96% 36.08% 27.35% 56.63%

Go Global – Investing Around The World

..BUT you have to be patient.

There is one caveat: Value underperforms the market from time to time.

Over a ten-year period from 2009 to 2018, measuring and investing via PCF in Hong Kong underperformed the Hang Seng Index in three out of the ten years.

Investing via PB in Japan underperformed the Nikkei 225 Index four out of ten years.

Investing via PS or PE in the United Kingdom and United States respectively would have underperformed the FTSE 100 and S&P 500 in five out of ten years!

However, given a long enough investment horizon, the winning years vastly outperform the losing ones and your returns are more than likely to be sweet. During these turbulent times, take comfort in the fact that the fundamentals are in your favour. Buckle up, sit tight and enjoy the ride.

If reading statements are too much work, then you can:

Ride on the trends. Momentum works.

What goes up will continue to go up. The reverse is true and that what has been falling will likely continue to fall.

We define momentum as the performance of the stock returns in the preceding 6 months and term winners are those who have outperformed 90% of its respective stock exchange.

Group Definition
Winners 6 months returns exceeding 90% of its peers

The trick here is to purchase the group of winners and hold on to them for the next three months.

Just following this strategy blindly produced the following annualised returns over a period of 10 years from 2009 to 2018. Imagine what market technicians could have done when leverage and risk management methods are applied.

Momentum can be found almost everywhere and works especially well in Hong Kong, Indonesia, Malaysia, the United Kingdom and Thailand!

Index Winners
United States 13.11% 16.15%
Japan 10.43% 11.71%
Hong Kong 9.80% 18.88%
Singapore 9.17% 6.38%
Indonesia 19.23% 34.21%
Malaysia 10.36% 15.80%
United Kingdom 8.55% 17.41%
Thailand 17.41% 37.53%
Vietnam 14.76% 16.23%

Go Global – Investing Around The World

Inefficiencies are good

And finally, we find that a recurring theme presents itself among the tests:

Developing markets (Southeast Asia less Singapore) outperformed the Developed markets.

Whether we are talking about unmanaged indices or managed strategies presented above, returns from the developing markets are higher than those of the developed markets.

If we were to attribute excess returns due to stock picking strategies (value or momentum), the alpha captured in the developing markets are also much higher.

The reason for this, we believe, is that inefficiency exists in the developing market. That means good news for you as an individual investor or trader as it presents many more trading opportunities.

Developed markets may be crowded when many more participants pursue similar strategies, especially in the US, and this chips away at the returns.

Ave Return of Index Ave Return of Strategies Alpha
Developed United States 10.21% 21.76% 11.54%
Hong Kong
United Kingdom
Developing Indonesia 15.44% 34.76% 19.32%

Who is the foreigner?

Being a foreigner is a matter of perspective.

From a Vietnamese point of view, Hanoi and Ho Chi Minh Stock Exchanges are their go-to when dabbling in stocks. To them, Singaporeans and the Singapore Stock Exchange ARE the foreigners.

Take a step back and have an objective look at markets:

Just like us, they eat, breathe and sleep.
Their markets are like ours and follow rules.
There is nothing foreign, just unfamiliarity.

The internet has made the world a smaller place. Why limit yourself and let non-factors stop you in beating your home bias?

We don’t even need to learn a new language like Japanese or Thai to trade the Tokyo or Thailand Stock Exchange!


All data presented are from Phillip CFD and accurate as of end February 2019. All foreign indices are represented in their respective local currencies.

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About the author

Tan Chek Ann
Senior Dealer

I sleep in the day and head the dealing desk at night.

In my nightly work, I attempt to do analysis, revolving around portfolio construction, long/short strategies, responsible leveraging and factors research.

Join me on my journey as I share my thoughts on various topics – though mostly still financial stuff.

Reach me at tanca@phillip.com.sg.

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