Valuation: Measuring and Managing the Value of Companies, Fifth Edition

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Valuation in Emerging Markets

The emerging economies in Asia and South America will experience strong growth over the coming decades, possibly even recovering from the 2008 recession earlier and faster than many developed economies. Over the long term, many analysts see China and India moving into the ranks of the world’s largest economies.⁴⁷³ This sometimes spectacular economic development will produce many situations requiring sound analysis and valuation. In the rising number of privatizations, joint ventures, mergers, and acquisitions, local financial parties such as banks and capital markets will display growing sophistication. Institutional investors will also continue to diversify their portfolios, adding international holdings in emerging-market stocks.

In Chapters 29 and 30, we discussed the general issues around forecasting cash flows in a foreign currency, estimating cost of capital in a foreign currency, and incorporating high inflation into cash flow projections. In this chapter, we focus on the specific issues that arise in financial analysis and valuation of businesses in emerging markets. Valuation is typically more difficult in these environments because of various risks and possible obstacles to businesses. These include macroeconomic uncertainty, illiquid capital markets, controls on the flow of capital into and out of the country, less rigorous standards of accounting and disclosure, and high levels of political risk. It is impossible to generalize about ...