Valuing companies in Emerging Markets

Valuation is usually difficult in emerging markets.

There are unique risks and obstacles not present in developed markets.

Additional considerations 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.

To estimate value, three different methods are used:

1. a discounted cash flow (DCF) approach with probability-weighted scenarios that model the risks the business faces,
2. a DCF valuation with a country risk premium built into the cost of capital, and 
3. a valuation based on comparable trading and transaction multiples.

For developed nations, the analyst must:

• develop consistent economic assumptions,
• forecast cash flows, and 
• compute a WACC.

Computing cash flows, however, may require extra work because of accounting differences.

If done correctly, the two DCF methods (1 and 2 above) should give the same estimate of value.

Chinese Stocks Lose Their Luster

The average price-earnings ratio of Chinese stocks sank 76 percent over the past decade as growth cooled and investors soured on the lumbering state-owned enterprises that dominate the country’s main equity index.

The most preferred emerging markets

http://economictimes.indiatimes.com/markets/global-markets/Emerging-markets-prospects-brighten-amid-Euro-zone-concerns/articleshow/10880321.cms

An entree to emerging markets

Reward for risk

Investors are being rewarded for the risk they are taking by investing in emerging markets, not for higher economic growth, Sauter says.

And, as the risks of investing in emerging markets are high, the long-term returns should be high.

Some of these risks are well known. Many companies in emerging markets are under family control. Their interests may not be aligned with those of minority shareholders and corporate governance standards can be low.

However, the risks of investing in Asia, in particular, are fewer than they used to be as the countries continue to develop, says Kerry Series, the chief investment officer of Eight Investment Partners, which specialises in the Asia-Pacific region.

''Emerging markets are still volatile but investors just have to put up with volatility if they invest in these markets,'' Series says, adding that emerging markets are still peripheral for global investors.

When there is investor nervousness, they withdraw their money from emerging markets first.

However, the volatility creates opportunities for astute fund managers, Series says.

While the link between economic growth and sharemarket performance cannot be established, robust economic growth is certainly not bad for share prices. Series says the fact the big developed countries will be growing slowly will likely mean more investor funds will be going into Asian shares, moving Asian share valuations from less than their true worth to a premium in the next several years.

Still, concerns persist, particularly regarding China, the biggest emerging market. Higher interest rates to subdue inflation have led to a credit crunch, squeezing property developers and slowing exports as a result of slower global growth, the chief economist at AMP Capital Investors, Shane Oliver, says.

Nevertheless, export growth in developing Asia, overall, has proved remarkably resilient, the portfolio manager of the Fidelity Asia Fund, David Urquhart, says.

Although Asia is certainly not immune to a slowdown in the West, the region's economy is significantly less reliant on exports to the West than many investors realise, he says. More than half of Asian exports are now traded within Asia or other emerging markets, which has meant export growth has remained resilient, even as growth in the West has slowed this year, Urquhart says.

Read more: http://www.smh.com.au/money/investing/an-entree-to-emerging-markets-20111111-1nbgy.html#ixzz1fzRPsnfO

Biggest Emerging Stock Fund Outflows Since January 2008 May Be Buy Signal

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By Michael Patterson and Jason Webb - Aug 12, 2011 11:08 PM GMT+0800

The biggest outflows from emerging- market equity funds since January 2008 may be a signal to buy stocks at the lowest valuations in 2 1/2 years.

Investors pulled $7.7 billion in the week to Aug. 10, the third-largest withdrawal on record and about 1.1 percent of assets under management, according to research firm EPFR Global. The MSCI Emerging Markets Index jumped an average 17 percent in the six months after outflows of this magnitude during the past decade, posting gains on 11 of 12 occasions, data compiled by EPFR Global and Bloomberg show.

The MSCI gauge sank as much as 20 percent from its May 2 high this week on concern theU.S. economy is stalling and Europe’s debt crisis is worsening. The slump sent valuations 30 percent below the 20 year average at 8.9 times analysts’ 12- month profit estimates, data compiled by Bloomberg and Morgan Stanley show. Fund outflows are a contrarian signal for rallies because they show pessimistic investors have already sold, according to Commerzbank AG’s Michael Ganske.

“When things are selling off and investors are very bearish and panicking then it’s clearly a good time to add positions,” Ganske, head of emerging-markets research at Commerzbank in London, said in a phone interview. “There is clearly a compelling argument to reassess exposure in emerging equities as valuations are very, very cheap.”

The strategy of buying emerging-market stocks after weeks when outflows exceeded 1 percent of assets under management produced average gains of 2.2 percent in one month, 8.5 percent in three months and 28 percent in 12 months, according to data compiled by EPFR Global and Bloomberg.

History Shows Gains

Investors have also been rewarded for buying when the MSCI emerging index fell below 9 times earnings. The last dip to those levels in October 2008 was followed by a 60 percent rally during the next 12 months, data compiled by Bloomberg show. The gauge climbed 44 percent in the year after valuations tumbled that low in August 1998, the month Russia defaulted on $40 billion of debt, the data show.

The MSCI index was little changed today after two days of gains. Reports today showed French economic growth stalled last quarter and euro-region industrial production unexpectedly fell in June.

The 21-country gauge has retreated about 5 percent this week after an unprecedented downgrade of America’s top credit rating by Standard & Poor’s and signs that Italy and Spainmay struggle to refinance debt. The MSCI Emerging Markets Energy Index sank 7 percent, the most among 10 industry gauges, as oil prices tumbled.

‘Growth Scare’

A further retreat in commodities may spur more outflows from developing-nation equity funds, according to John-Paul Smith, emerging-market strategist at Deutsche Bank AG in London.

“Over the short term it’s most likely a by-product of the global turmoil rather than a change of view on the relative attractions of emerging-market equities,” Smith said. “The real damage is likely to happen further out if, as we expect, investors become more negative about the fundamental prospects of both emerging markets and commodities.”

The MSCI index fell more than 15 percent in a month after fund outflows reached more than one percent of assets in August 2001, while the gauge retreated 6.5 percent when withdrawals exceeded that level in May 2006, data compiled by EPFR and Bloomberg show.

This week’s retreat in emerging-market share prices has produced buying opportunities and slowing growth in the developed world may ease inflation pressures in developing nations, said Ivo Kovachev, an emerging-markets money manager at London-based JO Hambro Capital Management Ltd.

The People’s Bank of China will leave borrowing costs unchanged for the rest of this year, according to eight of 10 analysts surveyed by Bloomberg this week. The Bank of Korea keptinterest rates unchanged for a second month on Aug. 11, while Indonesia stayed on hold Aug. 9.

“There has been a growth scare in the world,” said Kovachev. “But perhaps a bit perversely, it may help emerging markets because this year they were suffering from overheating and inflation risk.”

http://www.bloomberg.com/news/2011-08-12/biggest-emerging-stock-fund-outflows-since-january-2008-may-be-buy-signal.html

A week that knocked the financial world off its axis

Just another quiet summer week, really. The FTSE 100 started at 5,247 and ended at 5,320. It was hardly worth coming out of the sea to check your BlackBerry.

The chart shows the relative performance of Europe's high and low yielding shares but I could have shown a similar chart for Japan, where income has provided an escape from two lost decades for investors. 

By Tom Stevenson, on the Markets

2:40PM BST 13 Aug 2011

Comment

If only. The modest net gain for stock market investors disguised the most dramatic few days in the markets since 2008. If someone had offered no change as Wall Street was tumbling 6.7pc last Monday, few would have turned it down, I suspect.

That is perhaps the first lesson to be learned – the remarkable capacity for markets to confound investors' expectations. If the same patterns played out each time, we would have got the hang of it by now. But each crisis is different enough to ensure that history never quiet repeats itself, only rhymes.

I have drawn a few other conclusions from this fascinating week. First, while developed market shares are undoubtedly cheap they may remain so, and for good reason. It is quite unprecedented, that Fed chairman Ben Bernanke should have been prepared to pre-commit to near zero interest rates two years into the future. This speaks volumes about his pessimism regarding America's economic outlook. The persistent unemployment and low growth implicit in his assessment is incompatible with the Government's assumptions in its deficit reduction plan or many of Wall Street's earnings forecasts.

I think we are seeing a change in the investment environment on a par with the birth of the cult of the equity in the 1950s. That was when, for the first time, equities began yielding less than fixed income securities on the grounds that investors considered the growth potential of share dividends outweighed the extra risk borne by equity investors.

In recent years, the rare occasions when equities have yielded more than government securities have been viewed as a buy signal for shares, but in a low-growth, low-interest rate environment, this premium could become the norm again.

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Having been disappointed in recent years by the vain wait for jam tomorrow, in the form of capital growth, investors are likely to demand jam today, in the form of a high and sustainable income.

This renewed focus on income makes sense because, as the chart clearly shows, shares paying high dividends are not simply interesting to investors seeking to replace the income they can no longer find in cash or by investing in government securities. Income is both the main contributor to the total return from shares and an excellent indicator of future outperformance.

The chart shows the relative performance of Europe's high and low yielding shares but I could have shown a similar chart for Japan, where income has provided an escape from two lost decades for investors.

Looking forward, careful stock selection will be key to investment success. The sell-off has been indiscriminate and this is throwing up plenty of opportunities: good companies at great prices. I wonder whether we might not look back with some disbelief at a time when BP was available at just 5.5 times expected earnings or AstraZeneca at 5.7 times with a dividend yield of 6.5pc. Investor sentiment, measured using a combination of indicators such as market volatility, directors' dealings and fund flows, last week hit its lowest point since the collapse of Lehman Brothers .

What has also become clear this week is that we now inhabit a two-speed world. The transformation of emerging markets, especially those in Asia, continues regardless of the volatility in Western stock markets. It is interesting that the two worlds' markets have not become de-linked in the same way as their underlying economies have. I would be surprised if that did not change soon. The growth differential between Asia outside Japan and the developed world before, during and since the financial crisis argues for a much greater bias towards the region.

The unstoppable shift from West to East has important implications for stock markets closer to home because a key part of any analysis of companies quoted in London and New York is now their exposure to the growth potential of emerging markets. It is one reason why German stocks continue to look more interesting than their counterparts in other parts of Europe. Companies such as BMW and Siemens have understood and grasped the emerging market opportunity.

Meanwhile, let's hope tomorrow really does bring just another quiet summer week. We could all do with one.

Tom Stevenson is an investment director at Fidelity International. The views expressed are his own.


http://www.telegraph.co.uk/finance/comment/tom-stevenson/8699694/A-week-that-knocked-the-financial-world-off-its-axis.html

Investors turn their backs on emerging markets as returns disappoint

Investors turn their backs on emerging markets as returns disappoint


Formerly fashionable emerging markets have fallen from favour with investors, with an eye-stretching £185m being withdrawn from these funds in March.

Emerging markets include Brazil, Russia (above), India and China Photo: REUTERS

By Ian Cowie 6:00AM BST 19 May 2011

2 Comments

The net outflow for the month, the last for which the Investment Management Association (IMA) has figures, compares with inflows of £337m into strategic bond funds, £136m into North America and £96m into UK Equity Income funds during March, the last month of the Isa season.

One reason emerging markets – such as Brazil, Russia, India and China – have gone out of fashion is that returns during the last year have lagged behind more developed economies.

According to independent statisticians Financial Express, unit trusts and open-ended investment companies (Oeics) invested in continental Europe delivered average returns of 17pc over the last year while those in Britain returned 16pc and America managed 10pc.

By contrast, China lagged behind with total returns of less than 5pc over the last year, while Brazil delivered less than 3.5pc and Indian funds shrank by more than 4pc.

Despite dismal short-term returns, some experts argue that investors cashing out of emerging markets today may be making an expensive mistake.

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John Kelly of independent financial advisers Chelsea Financial Services said: "There will always be plenty of hot money sloshing around the markets as short-term investors try to capture opportunities between the margins of asset class and sector volatility.

"But investors should consider the context of their investment before jumping ship. The investment case for emerging markets is underpinned by a long-term projection of sustained economic growth with a few wobbles along the way. If an investor gets the jitters when encountering the first bump on the road, this investment was probably not the right one for them in the first place."

Similarly, Richard Saunders, chief executive of the IMA, said: "If you're going into the stock market you need to have an eye to the long term. The best way to accumulate a long-term nest egg is by regular saving over a long period of time – in other words, getting into the savings habit.

"The sums you need to accumulate to fund a comfortable retirement can seem intimidating in isolation, and for most of us the slow and steady strategy is the most realistic way to get there. Regular saving has the added advantage of providing a way to handle a volatile market that can go up and down in the short term in unpredictable ways.

"Investing a lump sum at one time leaves you exposed to the vagaries of the market, which may be unusually high or unusually low on that day. But investing a little every month helps to smooth out these ups and downs and deliver a steadier return over time."

For now, fear has replaced greed as the dominant factor in investor sentiment but Ash Misra, head of investment strategy at Lloyds TSB Private Banking, predicted that those willing to take a longer view might profit from doing so.

He said: "Once sentiment swings back and the valuation imbalances between developed and emerging markets disappear, investors will focus once more on fundamentals. The emerging market advantages of a younger demographic, stronger banking systems and healthier private sector balance sheets are compelling.

"Also, emerging government policies including fiscal conservatism, lower taxes and reduced spending will further buttress the case for emerging markets. In time, money should flow back into emerging markets as the relative valuations between the two markets equalise and the fundamental strengths of emerging markets will be attractive once again."

http://www.telegraph.co.uk/finance/personalfinance/investing/8521913/Investors-turn-their-backs-on-emerging-markets-as-returns-disappoint.html

Chart of the day: Flows to emerging market equity funds

In terms of fund flows, 2011 does not seem to be turning out well for emerging markets. In fact, today's chart of the day shows that funds have been withdrawn from emerging markets in 2011 so far as compared to 2009 and 2010. In those years, investors rushed to emerging market shores to capitalise on the strong growth opportunities there as the developed world languished in recession. Now with inflation rearing its ugly head and food prices soaring, concerns have begun to emerge from these fast growing markets too. 




* Up to Feb 8
Data Source: The Economist

Take a long-term view on emerging markets. Investment is sometimes a case of getting one or two big decisions right.

Tom Stevenson
Take a long-term view on emerging markets
Investment is sometimes a case of getting one or two big decisions right.

The Nikkei and the FTSE 100 were left for dead by India's Sensex in the past two years 

By Tom Stevenson, on the Markets 6:08AM GMT 26 Dec 2010

4 Comments

Let's assume that on March 3 2009, as global markets hit bottom, you recognised amid all the fear and loathing that this was the time to buy. With markets all around the world on the skids, which would you have chosen?

The decision you took, as the chart shows, was an important one because the returns in the 21-month recovery since then have been anything but even. £1,000 invested in the Japanese stock market has turned into £1,250 over that period. Better than a poke in the eye but not great from the starting point of one of the worst-ever bear markets.

If you'd succumbed to home bias, you would have done better. The FTSE 100 index has risen by 69pc since March 2009. But both of these developed markets have been left for dead by India's Sensex, which has turned £1,000 into £2,380 in less than two years. It is little wonder that flows into emerging market funds took off last year or that the consensus for 2011 returns is so unanimous. Go East young man has been the clear message.

Until the past few weeks that is, when the mood music changed. They remain a minority, but the voices calling the top for emerging markets are gaining in confidence. The consensus is "complacent", some say; others suggest that investors are blowing a bubble that will end badly.

There is plenty of evidence that investors have fallen in love with the emerging markets story, with around half saying they expect to increase their exposure to stocks in the developing world and a quarter saying they want more emerging market bonds. The numbers of investors saying they want to reduce their exposure is vanishingly small.

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The case for adopting a more cautious stance is reasonable. Valuations, which have traditionally put emerging markets at a discount to the developed world to reflect the greater risks involved, are now broadly comparable. Inflation, with the notable exception of the UK, is not an issue in the developed world but increasingly it is a headache in emerging markets. Meanwhile, concerns about corruption and poor infrastructure have not gone away – investors are just choosing to ignore the former and to see the latter as an opportunity.

Crucially, investors are being warned that GDP growth and investment performance have not historically gone hand in hand. The price you pay for growth is quite as important as the growth itself and if the good news is already priced in then a popular market can run very fast just to stand still.

I understand the scepticism in the short term and, as I have written in the past few weeks, I think developed markets such as the US, selected parts of Europe (such as Germany) and even Japan will have a relatively good year in 2011. But on a longer-term view, I'm not prepared to give up on the emerging market story.

Take India. Since economic liberalisation began under current prime minister Manmohan Singh in 1991, GDP has grown by an average of 6.3pc a year, almost twice the average for the global economy as a whole. Between now and 2015, according to the International Monetary Fund, growth will average 8.4pc, again twice as fast as the rest of the world.

India has enormous problems – illiteracy, widespread poverty, high infant mortality – but so many advantages too. Almost a third of the population is aged under 15 and just 5pc over 65. The government has pledged to all but double spending on physical infrastructure by the end of the current five-year plan to 2012.

More than $500bn will be invested, with maybe twice as much in the next five-year period. The Indian population is poised on the brink of an explosion of domestic consumption as its income per capita enters the sweet spot where people, for the first time in their lives, move beyond subsistence.

Yes, valuations matter, especially in the short term. But over the longer term, the steady compounding of a superior growth story is more important. When I bought my first property in London 20 years ago, close to the top of the market, all the same arguments would have applied. But the 10pc or so I may have paid over the odds at the time is totally inconsequential today. In 20 years' time, I don't expect to be quibbling about the PE ratio of the Indian market in 2011.

tomrstevenson@fil.com

• Tom Stevenson is an investment director at Fidelity Investment Managers. The views expressed are his own.

http://www.telegraph.co.uk/finance/comment/tom-stevenson/8224122/Take-a-long-term-view-on-emerging-markets.html