Equity Valuation in Emerging Markets: An Exploratory Study

Abstract

The unique characteristics of emerging markets, alongside the involvement of personal judgement in determining value metrics, make equity valuation in these markets particularly challenging. Using a phenomenological approach, this study seeks the expert opinion of academics on both objective and subjective elements of equity value in these markets. The thematic analysis of their responses reveals that quality of earnings, diverse and distinctive sources of risks in emerging markets to be included in the risk premium, and uncertainty surrounding the growth rate must be carefully assessed and evaluated. While selecting the models, analysts should consider not only integration of emerging markets with global markets but also potential inconsistencies in the model inputs. This study finds that discounted cash flow models are preferred over price-based, relative valuation models because of the instability of the market prices, and within discounted cash flow models, free cash flow models are favored over the dividend discount model. The findings are expected to guide the investors and analysts in the selection of the right valuation metrics and models for accurate equity valuation.