Capital Investments in Emerging MarketsThe outlook on importance of a particular investment can be vary depending on a person’s perspective. It can vary because the expectations and goals are not measured the same.
An average person may look at their house, car, school or even education as an investment. Those people take their money and distribute it with the expectation of making a beneficial long term decision.
Over the past few years. Investment opportunities in emerging markets have grown dramatically. ” Governments across the developing world have sought to shift their economies to a higher growth plane by facilitating increased investment in key sectors, allowing private investments in formerly state-owned companies and supporting the growth of privately held companies. As a result, the EM corporates market has deepened in size and attracted more investor interest, and is now offering investment opportunities in many sectors like energy, metals and mining, transportation, telecommunications, social housing and banking, among others.” CITATION Pim1 l 1033 (Pimco, n.d.) Companies use several different techniques to determine if they should invest in a project or not. The time value of money, the future cash flows expected, the uncertainty related to cash flows and the performance metric should all be considered when deciding whether to invest in a project. “The most commonly used methods for capital budgeting are the payback period, the net present value and an evaluation of the internal rate of return. None of these methods are completely reliable by themselves. They all have their flaws for making an intelligent analysis, when evaluating the worth of several projects.” CITATION Jim181 l 1033 (woodruff, 2018) Just because a project has a higher internal rate of return, doesn’t mean it will have a good effect on future cash flow. On the other hand, a project with a shorter payback period could continue producing cash flows after the payback period ends. You never know which method would work best, so it’s good to use all the methods of analysis. Target Corporation which was created in 1962, is an American mass-market retail company. In the recent years, Target has had to change the way they operate to keep up with the changing emerging market. In a new era of retail, customers are shopping in a different way. More customers are shopping online. Target has invested over $7 million dollars in capital and over $1 billion in operating cost to keep up with the changes. I think target would benefit from the using the potential future cash flow expected method to decide what and how they invest in the emerging markets. Target’s CEO, Brian Cornell recently stated that “We’re investing in our business with a long-term view of years and decades, not months and quarters,” Brian said. “We’re putting digital first and evolving our stores, digital channels and supply chain to work together as a smart network that delivers on everything guests love about Target, including more than a dozen new brands we’ll introduce over the next two years. We’re confident our strategy meets the challenges of today and will lead us well into the future.” CITATION htt l 1033 (htt)
In recent years, as economies in developed countries have slipped and stagnated, a number of U.S. and other companies have sought to fuel growth by investing in emerging markets. There are many benefits to employing such a strategy: Developing countries promise access to new, untapped markets; rising levels of consumption, driven by rapidly growing middle classes; and access to inexpensive labor and materials. While investing in emerging markets can be rewarding, it can also come with a great level of risk. Corruption, Lack of transparency and currency fluctuations are among a few of the risks associated with investing in the emerging markets. “Emerging economies, more so than those in the developed world, are often saddled with corrupt politicians, bureaucrats and businesspeople. The E7 nations—China, India, Brazil, Russia, Indonesia, Mexico and Turkey, considered the primary sources of the world’s economic growth through 2050—are among the poorest performers on Transparency International’s Corruption Perception Index, which measures public sector corruption.” CITATION Mic111 l 1033 (Ferguson, 2011) Corruption is often the influence of past government legacy’s. Even after the corrupt leader is out of office, the corrupt traditions continue. U.S. companies can protect themselves against corruption by having a clear understanding of their responsibilities under the FCPA and other international laws. “To protect against charges of corruption, companies need to keep books, records and accounts that accurately reflect their transactions and disposition of assets. In addition, companies need to devise and maintain internal accounting controls aimed at preventing and detecting FCPA violations” CITATION Mic111 l 1033 (Ferguson, 2011) Lack of transparency into how the government does business can be a huge problem even when corruption isn’t present. Currency fluctuations can also be a major risk factor for investing in emerging markets. The different currency exchange rates can sometimes increase your profit or cause you to lose out on cash flow. Despite the risks, investing in emerging markets offer far greater rewards.
The major modication target should take in evaluating it’s investments would be to use the payback period method to evaluate the project. The payback period method tells you how long it will take to earn the money invested into a project back. This method will be most beneficial to target because technology and buyer needs are always changing. If it takes to long to earn invested money back, it won’t be able to keep up with the ever changing technical needs of the customers.
Inflation can have a negative impact on capital investments in emerging markets. Inflation by definition is the increase in prices and the fall in the purchasing value. It reduces the value and money, which deflects the purpose of a capital investment. The goal of a capital investment is to make a profit, expand, and retain longevity off of a business venture, project or machinery. New emerging markets consist of foreign countries that have not fully developed the characteristics of a developed market. There are less strict security regulations. Their markets structures are still in the process of development and rapid growth. Those factors stem from socioeconomic status, such as class, education and wealth. Which is why the main goal of the emerging market is to become more advance. If inflation occur on an emerging market it will negatively impact those markets. Inflation can effect discount rates and cash flows. In most cases inflation decreases the value of real rate of return. Discount rates is also the rate of return, which is the target rate. The target rate for investors should be the inflation rate together with the expected inflation rate. CITATION Eco1 l 1033 (Economy watch , n.d.)A sensitivity analysis used in a financial context is beneficial to a company’s project. The purpose of a sensitivity analysis is to identify the key variables that have a positive impact on a project’s cost and benefit . When investors want to capitalize off an project this method can help prevent a negative result from occurring. This method can also help the business adapt to any changes in the market. Sensitivity analysis is used to estimate the effects of different variables on investment returns. Sensitivity analysis is used to assess ricks and potential mistakes that make arise in the investment project. “Perhaps the most common investment application of sensitivity analysis involves adjusting the discount rate or other streams of cash flows. This allows you to re-evaluate risks based on specific adjustments.´ CITATION Sea l 1033 (Ross, n.d.) Sensitivity analysis offers insight on how your investment is structured. “Sensitivity analysis is a calculation procedure that predicts the effects of changes of input data. Investment decisions are wracked with uncertainty and risk. Most investment models have explicit and implicit assumptions about the behaviors of models and the reliability and consistency of input data.” CITATION Sea l 1033 (Ross, n.d.) For example, if a company assumes that the price of materials will rise in the future, then they would purchase materials at the current price. But if they foresee that the price of materials will decrease in the future, they might hold off on buying materials. Over the next 3 years, Target Corp will be reimagining more than 600 locations. Sensitivity analysis will help Target with their upcoming renovation projects. They can analysis the cost of goods and materials and make the best decisions about their investments.
The risk to investing in the emerging markets may seem great, but If the company takes the steps to evaluate these risks before investing and continue to evaluate the investments often, the reward will out way the risk.