Valuations in Volatile Times

During the past three years, the world has been impacted by multiple waves of a global pandemic (including lockdowns, introducing and removing economic stimulus packages, disrupted supply chains, and reduced flows of skilled migrants), the war in Ukraine, and increased abnormal weather events. As a result, business and consumer confidence has ebbed and flowed.

In Australia, these economic and geopolitical factors have resulted in:

  • Inflation increased from nominal levels to 6.1% for the 12 months to 30 June 2022 (having not yet reached its peak)
  • The 10-year Australian Government bond rate increased from 0.8% in September 2020 to 3.7% in June 2022
  • Corporate bond yields rose from 1.9% in September 2020 to 4.8% in June 2022
  • A rollercoaster ride for the share market, with certain sectors exhibiting significant outperformance and others devaluation relative to the market at different points (e.g., oil and gas and technology companies).

Global impacts across these factors have been similar, as we illustrate.

Impacts on Markets

As set out in the chart:

  • Between March 2020 and December 2021, the ASX 200 index increased from 5,077 to 7,445 points – a range of 47%!
  • Recently, VRG Australia’s assessment of market discount rates has increased significantly.

VRG Australia Leadenhall Discount Rate Share Market MovementsSource: Discount rate update 30 June 2022 | Leadenhall | Now You Know

Global share markets have fluctuated similarly.Corporate bond and inflation rates of developed economies have generally increased substantially since September 2020.

Valuation Impacts

The underlying economic and geopolitical uncertainties impacting global economies are making valuations more difficult and subjective.

The VRG Australia team suggests a structured approach that considers each factor’s cause and effect on the value of the business and the relevant valuation approach.

Below we summarise key business and valuation impacts associated with some of the most pressing economic and geopolitical factors being encountered:

Australia Economic Factors Valuation ImpactsThe key takeaways are that:

  • A structured and methodical approach is critical from the perspective of the business being valued.
  • A cookie-cutter approach should be avoided, as no two businesses or industry sectors respond similarly.
  • Discounted cash flow (DCF) valuations are necessary for most companies in the current environment due to earnings and cash flow variability.

If you require assistance navigating a valuation in the current climate, we welcome you to contact VRG.