I want to value a few equities in emerging countries, specifically china and brazil. Would a country equity risk premium need to be added to Chinese valuations still, considering the economy has stabilised and is emerging as a developed country? What other additions would need to be looked over when valuating emerging securities with the DCF? Is the DCF still applicable to emerging markets (with a whole view of industries)? Any help would be great
Uh, China’s come a long way fast, but I think it’s a far cry from a developed economy. If you were asking about South Korea or Taiwan, it might make sense, but China still has lots of developing country features.
The country risk premium isn’t just a reflection of being “developing”. It also reflects things like security risk: how likely will there be a war or a revolution or coup or major change in how the economy is governed. There is also liquidity considerations, such as what happens when everyone runs for the exits at the same time.
A country equity risk premium? Sure theoretically correct.
In a practical sense, the discount rate should be YOUR personal required rate of return. I have seen PM’s use this instead of CAPM. This make more intutive sense and CAPM is great because its easy to do oh wait it doesn’t work forget that.
My advice make your discount rate your required return. (i.e: 12-15% for most people, although for large caps I have seen PM’s go for 10 - 12%.