What market risk and risk-free rates are your UK peers using now?

BVWire–UKIssue #28-1
July 6, 2021

The average market risk premium UK analysts use was 5.6% in May, according to “Market Risk Premium and Risk-Free Rate Used for 88 Countries in 2021,” the latest research from Pablo Fernandez, Sofia Bañuls, and Pablo Fernandez Acin. The median was 5.7%, and this compares to a 5.5% average rate reported by valuation professionals in the U.S.

This paper contains the statistics of a May 2021 survey about the risk-free rate (RFR) and the market risk premium (MRP). By June 3, 2021, 1,624 email responses were received (from more than 15,000 sent). Fernandez referred to this ongoing study when he spoke last month at the ICAEW 2021 Business Valuation Conference.

Average UK risk-free rates in May were 1.3% (with a lower 1.0% median). The UK’s rate is higher than most Scanadanavian and European nations, where rates in the 0.5%-to-0.9% range are more common. Given international conditions, respondents from Switzerland reported a negative RFR.

In the paper, the authors make these observations:

  • Most previous surveys have been interested in the expected MRP, but this survey asks about the required MRP. Still, the return to market equity rate in the UK has trended toward a low point of 6.8% currently. Last year, it was 6.9%, compared to 6.9% in 2020 and 8.3% in 2019.
  • Practitioners in South America report the highest required return rates—Venezuela led all countries, followed by Argentina.
  • For European countries, many respondents use a risk-free rate higher than the yield of the 10-year government bonds; and
  • The coefficient of variation (standard deviation/average) of the risk-free rate is higher than the coefficient of variation of MRP for the euro countries.

Pablo Fernandez, the professor in the department of financial management at the University of Navarra—IESE Business School in Spain, has over 200 papers published on SSRN, many of them related to valuation. He currently ranks first in all-time downloads on the 25-year-old research site.

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