emerging market valuations

emerging market valuations

should be adjusted for country risk?	Yes
- adjusting cash flows?	Yes(*)
- adjusting discount rate?	No(*)
companies within an emerging market will be affected differently by country risk? (e.g. exporters and importers)	Yes
country risk for foreign investors > that for local investors	Maybe
Is country risk asymmetric / one-sided?	Yes (*)

(*) Because many emerging market companies have risk profiles that are one-sided (down only). It is best to adjust for this in the cash flows rather than adjust the discount rate.

• When estimating the percent of debt and equity in the capital structure, the debt and equity weights from a global industry index should be used, not the market value of the firm's debt and equity, nor the book value.
• Firms in emerging markets often use debt conservatively and this results in lower leverage ratios than for firms in the same industry in other countries.
• The industry beta, not the individual firm beta, will be needed to obtain the cost of equity capital in the CAPM. The beta should be estimated for the company's industry by regressing the company's industry returns against a well diversified global index, not the local market index.