Emerging market valuation

Emerging market valuation

Adjustmement		Correct	Incorrect	Reason	Risk for foreign investors
Country risk		Cash flow	Discount rate (*2)	(*1)	(*3)

(*1) Companies within an emerging market will be affected differently by country risk. For example, exporters would benefit from a weaker local currency, but importors would be hurt by a depreciating local currency.
(*2) Adjusting the discount rate by the same amount for all companies within a country would misstate the influence of country risk on each company. See (*1).
(*3) Country risk for foreign investors may be greater than that for local investors. Country risk is asymmetric 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 to adjust the discount rate.