COVID-19 dominates a lot of the discussion in the latest edition of KPMG’s 3Q2020 International Valuation Newsletter (IVN), though, as editors Johannes Post and Rolf Langenegger note, it ‘is not the only issue.’ BVWire—UK readers looking for a good summary of the effects the pandemic has had on UK and global markets should turn here, even though the effects on private companies, the LSE, and other markets are now familiar to everyone.
The new issue reviews many key focus areas of valuation (share prices, analyst consensus forecast estimates as well as beta factors by sector, and the various scenarios for recovery). At the center is the performance of FTSE during the crisis—down 32.8% in February and March, and back up 23.5% by June 20, where, along with the EURO STOXX 600, it remains the overall weakest performing major index.
This issue of IVN also offers business valuers some solace as it summarises the key challenges when implementing various valuation approaches in the context of today’s challenging environment.
Even the most sophisticated and widely-accepted valuation approaches, with the most detailed valuation analyses, undoubtedly, will struggle to eliminate the uncertainty of their results in an environment like today’s. However, the appropriate application of valuation methodologies and approaches should include sufficient details of the underlying process with the goal of increased transparency, thus allowing the audience of the valuation analysis to form their own view and have a more solid basis upon which a decision can be made.
Unlike ‘normal’ times, KPMG particularly notes the impact of interest rate drops on current risk-free rates for major currencies with Germany experiencing negative interest rates again, and changes in country risk premiums, particularly for Brazil and India, have increased. Further, KPMG warns valuation experts that differences in financing structure that might not be material in the past must now be reviewed because ‘debt leverage is increasing substantially and the cost of debt is increasing as well.’
Meanwhile, the BDO Valuation and Business Analytics Practice has published the findings of its new ‘The Path Ahead’ study, examining over 20,000 equity analyst estimates for 428 public companies spread across 24 industries. This is a great resource for financial experts who need to document their assumptions about the UK’s recovery trajectory, particularly now when analyst estimates have been even more volatile than equity prices.