New evidence on value investing in emerging equity markets

We design modified value investing strategies in emerging equity markets by comparing a country's value weight with its market capitalization weight among a group of emerging countries. These strategies can be easily tested and implemented by using various country index funds. Our proposed strategy calculates the delta weight, the difference of a country's weight based on value (Gross Domestic Product (GDP), Earning-Price (EP) ratio or Dividend Yield (DY)) and its capitalization weight, for each country. If the delta weight is positive, the country's index fund is considered undervalued and the strategy is to buy delta shares of that country's equity. Conversely, if delta weight is negative, the country's index fund is deemed as overvalued and the strategy is to short delta shares of that country's equity. These market neutral delta strategies can generate annualized returns of 14.25-16.89% even with the presence of overweighting constraints which limit the over-investment in small financial markets.