Emerging Markets Company Valuation: Investigation on Country Risk

Every business transaction entails some degree of risk. When it occurs across international borders, it implies further risks than those merely present in a domestic market. These additional risks are called “country risks” and they stem from a wide range of different sources. Typically, countries identified as emerging are those with higher risks, but higher risks could be compensated with higher returns. The determination of value of companies and projects coming from such frameworks becomes then a crucial topic as they become larger players in the global economy as well as likely candidates for investment portfolios. But these markets exhibit so peculiar and different features that we must be extremely cautious in directly applying insights gleaned from the developed world, making them worthy of attention and deeper studies. Indeed, analysts are struggling with valuation questions that arise when dealing with non-developed market companies. Accordingly, they have developed an alternative solution more prone to be applied in the framework of emerging markets. This is called multiples valuation and has its foundations on the comparison with specific financial metrics of a group of similar companies. These metrics vary between sectors, inter alia, due to the impact of country risk. We believe that there are some sectors more prone to others to suffer from country effects, while others can be left untouched or even show better metrics. The argument is organized as follows: the first chapter reviews and compares the broad academic and practitioner literature addressing the topic of valuation in emerging countries. The second section summarizes the main characteristics of emerging markets, gathering and presenting the most recent available data. Finally, the third chapter presents the empirical analysis on a sample of companies’ multiples.