Damodaran sees "back-filling" after surprisingly quick ERP rebound

“I must confess that I was surprised at how quickly the market has come back from the crisis, though the economies seem to be lagging,” admits Professor Aswath Damodaran (NYU Stern School of Business), in his latest e-newsletter (Feb. 5, 2010) (available at his website). “During the year, the equity risk premium dropped from 6.43% to 4.36% and default spreads also narrowed dramatically; we are effectively back to where we were on Sept 12, 2008. Emerging markets bounced back particularly well and the gap between developed and emerging markets narrowed substantially.”

There may be some “back-filling” this year, the Professor adds, as the market tries to consolidate its gains. “Much will depend on whether we see more shocks to the system (Greece default?) and how strong the economic recovery is.” Busy as always, Damodaran has just finished updating The Dark Side of Valuation—Valuing Young, Distressed, and Complex Companies, and the third edition of his applied corporate finance text (in which he expands the analysis of Disney, Aracruz, and Deutsche Bank and adds Tata Chemicals to the mix), should be in bookstores in a couple of weeks. “I hope to finish a third project this year,” he says: a book on the lessons learned from the economic crisis. “It is a work in process, since I keep learning new lessons.”