Volatility Rules: Valuing Emerging Market Companies

Abstract

As the center of gravity shifts from developed markets in the United States to emerging markets in Asia and Latin America, analysts are also grappling with estimation questions that arise more frequently with emerging market companies. In this paper, we begin by looking at common errors that show up in emerging market company valuations. We then deal with two big issues that underlie these valuations. The first relates to country risk and how best to deal with it in valuation. In particular, what are the country risks that we should incorporate into cash flows and when does country risk affect discount rates? The second arises from the lack of transparency and poor corporate governance that characterize many emerging market companies. We close the paper by examining how best to do relative valuation in emerging markets, especially when the comparable companies are listed in other markets.