Security Analysis and Business Valuation on Wall Street,: A ... - lib

358 SPECIAL CASESEXHIBIT 27.5Emerging Markets Stock Selection GuidelinesA few things to look for in buying an emerging market stock include:Country Reasonably stable economic indicators. Moderate political risk.Capital Markets Semblance of fair trading <strong>and</strong> honest disclosure. Degree of liquidity for investor ease in getting in <strong>and</strong> out of positions.Industry Good growth prospects. Internationally competitive. Profits not reliant upon: Tariffs Quotas Other trade barriers Oligopoly ensures profit margins.Company Modern management techniques. Widely held ownership or influential multinational shareholder that promotes share priceenhancement. Strong government connections through family or management. Good track record <strong>and</strong> solid balance sheet. Favorable growth prospects. A portion of revenues are exports <strong>and</strong> denominated in U.S. dollars <strong>and</strong> euros. Share price meets margin-of-safety rule.Capital MarketsSince few stocks move against the general trend, the investor needs to be confidentof the market’s upward direction (or downward move, in the case of a short sale).Additionally, a minimal st<strong>and</strong>ard of fair trading <strong>and</strong> honest disclosure is a strongplus for the foreign participant. With many countries suffering from high inflation<strong>and</strong> currency risk, interest rates can be high by U.S. st<strong>and</strong>ards. Russia, one of thelargest emerging markets, consistently has local interest rates in the mid-teens.IndustryThe primary focus of the foreign investor is finding local industries with growthprospects. Surprisingly, many sectors considered stodgy in the United States are consideredhot in the emerging markets. One illustration is the electric utility industry.In the United States, this industry is mature; unit sales growth is only 2 to 3 percentannually. In contrast, electricity dem<strong>and</strong> growth can be double this rate in a marketsuch as the Philippines or Brazil, because advancing prosperity means more electricappliances <strong>and</strong> devices. In 2010, Vietnam had one car for every 100 people, a tinyfraction of the ratio in a wealthy country. Vietnam’s auto sales are forecast to growat 10 to 12 percent annually for many years.