Valuation, 7th Edition

35Emerging Markets^*

The world’s emerging economies, home of 86 percent of the population, accounted for about 59 percent of global GDP in 2017 and are growing faster than the developed economies.¹ As emerging markets become more important to the global economy and to investors, sound methods are needed for analyzing and valuing companies and business units in these markets.

Chapters 26 and 27 discussed general issues related to forecasting cash flows, estimating the cost of capital in a foreign currency, and incorporating high inflation rates into cash flow projections. This chapter focuses on additional issues that arise in emerging markets, such as the potential for extreme economic contractions or unexpected government actions like asset appropriation. It is impossible to generalize about these risks, as they differ by country and may affect businesses in different ways. Academics, investment bankers, and industry practitioners subscribe to different methods and often make arbitrary adjustments based on intuition and limited empirical evidence.

For accurate valuation of companies in emerging markets, we recommend using a scenario discounted-cash-flow (DCF) approach as described in Chapter 16 to prepare multiple cash flow scenarios reflecting the outcomes of different risks that a company could face. These scenarios are each discounted and then weighted by probabilities assigned to each. You can supplement this method by comparing the results with two secondary approaches: ...