VRG Germany recently released the 10th edition of the European Capital Market Study. With this study, we provide a data compilation of capital market parameters required for the valuation of a European business. The study is a tool and data source to show trends in the parameters analyzed. It provides the following information:
- The Capital Asset Pricing Model (risk-free rate, market risk premium and beta) is used to calculate the cost of capital.
- Implied and historical returns for the overall market and sectors.
- Capital structure adjusted implied sector returns as an indicator for the unlevered cost of equity.
- Relevered cost of equity is calculated by adapting the unlevered cost of equity to a company’s specific debt situation, which serves as an alternative to the CAPM.
- Empirical (ex-post) cost of equity in the form of total shareholder returns consisting of capital gains and dividends, used as a plausibility check for the implied (ex-ante) returns.
- Trading multiples.
Capital Market Developments
The European Capital Market Study highlights the following capital market developments in the first half of 2022:
- The European risk-free rate increased significantly between December 2021 and June 2022 from 0.09% to 1.32%, anticipating a rate hike by the European Central Bank.
- The market risk premium increased from 7.4% to 8.1%, in line with the increasing macroeconomic risks caused by the Ukrainian war, energy shortages, and rising inflation.
- As a consequence, levered cost of equity increased strongly across all sectors.
- The current market risks are also reflected in the increased market volatility, with the EURO STOXX 50 volatility (VSTOXX) at the upper end of the usual volatility range.
- The higher cost of capital was also reflected in lower market capitalizations and hence lower valuations, which – in the form of multiples – declined by about 25%.
- Multiples declined in each sector, whereby the highest decrease was observed for Real Estate companies, which were impacted by the increase in debt service costs due to rising interest rates, combined with higher material prices.
- Consumer non-cyclicals, known for enjoying strong demand during economic downturns, had the smallest drop in valuations.
- The relative valuations of the different sectors have not changed significantly.
- The technology sector remains the most expensive one, reflecting the comparably high anticipated growth rates;
- In contrast, the financial sector continues to have the least expensive valuation level, with the prospect of interest rate hikes being a good sign for the former, but high inflation and a potential recession weighing negatively on financial companies.
Download: European Capital Market Study
Get your copy of the complete European Capital Market Study, from VRG Germany, ValueTrust Financial Advisors.