Money Left on the Table: Why some emerging stock markets sell at a discount?
Why do some emerging stock markets trade at vastly different valuation levels? For example, a dollar of earnings from India’s listed companies today are valued at $19, while a dollar of earnings from Russian public companies are only valued at $7. The new research examines a variety of factors impacting valuations.
Emerging economies plagued with relatively low stock market valuations pay a steep price. For example, if Russian stocks were equal in relative valuation to the emerging market average, it would add approximately $400 billion to its current stock market capitalization.
Some of the most important findings of the research include:
Among the BRIC countries, India easily has the best investor protection, ranking 49th globally.
Russia experienced by far the largest drop in investor protection ranking since 2007 (falling from 60 to 117).
The quality of auditing and accounting standards were found to be an important influence of stock valuations (price-earnings multiples).
Since the beginning of the economic crisis, India has experienced the greatest deterioration in auditing and reporting standards.
Protection of minority shareholders was another strong factor impacting stock market valuations.
South Africa and Malaysia remain exemplary in this category, consistently scoring highly in recent years.
Russia easily comes last in protection of its minority shareholders. Abuse by dominant or controlling block shareholders is endemic across most Russian listed companies.
The paper also found that the share of state-owned enterprises (SOEs) was an important factor impacting equity valuations (the larger the state ownership or control of the stock market, the lower the stock valuations).
In China, we see a greater bias towards large ownership stakes in publicly traded companies. The state is the biggest shareholder in the country’s 150 largest companies, and it guides and influences thousands more.