I have been reporting industry averages for corporate finance and valuation variables (returns, betas, costs of capital multiples) for a while now: this is my 15th annual update for US companies, and my seventh for European, Japanese and Emerging Market companies. In most years, the changes over the previous year have been marginal, especially for developed market companies. But the 2009 update was very different. Here are some of the highlights:
1. Risk premiums: Both the equity risk premium and default spreads on debt jumped dramatically over the year. The equity risk premium started 2008 at 4,37% and ended the year at 6.43%, its highest value since 1978. The default spreads more than doubled, and in some cases tripled, over the year for every single ratings class; for instance, the spread on a Baa1 rated bond increased from 1.75% to 5.25%. This will have profound effects on valuation. The same company, with earnings, beta and rating unchanged, but with default spreads updated is worth about 40% less today (in intrinsic value terms) than it was a year ago. (One aside. The risk premiums for debt increased more than the risk premiums for equity, which has implications for the mix of financing used by firms).
2. Emerging Market risk: In a crisis, risky asset classes get hit the worst and the country risk premiums for emerging markets have increased for two reasons. One is that the base mature market premium is now higher. The second is that the premium you demand for an emerging market is now higher. For example, the equity risk premium for India has increased from 7% to 11%. The drop in the Sensex should be no surprise.
3. On a multiple basis, everything looks cheap: The sector averages for every multiple - revenue multiples, PE ratios and EV/EBITDA - seem to suggest that we are surrounded by bargains. Before you jump in, a note of caution. The prices are as of January 2009 but accounting numbers lag. The most recent fiscal year for most companies in January 2009 is the 2007 fiscal year. Even trailing 12-month data ends in September. We are scaling post-crisis prices to pre-crisis accounting numbers. Hence, the low multiples. I will do an update in May 2009 and those numbers should contain some of the crisis impact. I am afraid the mismatch will not disappear until the 2010 update.
One final note. I have been asked why I do these data updates and put them on my site. I would love to claim that I am the "Mother Theresa" of finance but I do it for purely selfish reasons. Curiosity drives me to look at the data, and since the tools to convert raw data to accessible data are easily accessible, I bear no cost in sharing what I find with the rest of the world. I hope you find the data useful.
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