Hi guys,
In the study text on Capital Market Expectations, it has been stated that the method of comparables and relative value approach is not as suitable in Emerging Markets as it is in developed markets
Why may this be the case? How does the geographic market affect the validity of the comparables or relative value approach?
Regards,
Because every emerging market is unique in its economic, political and legal risk. Some emerging markets have vibrant economies and not as risky.
Book 2, Page 228:
“Before discussing these country risks, note that some countries that are labeled as emerging markets may in fact be healthy, prosperous economies with strong fundamentals. Likewise, the political and legal issues discussed in this section may or may not apply to any particular country. Furthermore, these risks will, in general, apply in varying degrees across countries. **Emerging markets are widely recognized as a **
very heterogeneous group.”
Well just think about it. Emerging markets are illiquid (non-fully developed markets). It is less accurate to use comparables against things that are illiquid.