data 2017 update 4: country risk - new york...
TRANSCRIPT
DATA2017UPDATE4:COUNTRYRISK
AswathDamodaran
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Proposition1:It’swhereyouoperate,notwhereyouincorporate
¨ Itiswhereacompanyoperatesthatdeterminesitsriskexposure,notjustwhereitisincorporated.
¨ Thus,youcanhaveUScompanieslikeCocaCola(throughitsrevenues)andExxonMobil(fromitsoilreserves)withsubstantialemergingmarketexposureandemergingmarketcompanieslikeTataConsultingServicesandEmbraerwithsignificantdevelopedmarketexposure.
¨ Infact,whatwefaceinvaluationincreasinglyareglobalcompaniesthatthroughtheaccidentofhistoryhappentobeincorporatedindifferentcountries.
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Proposition2:CountryRiskaffectsValue
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MeasuringCountryRisk– SovereignRatings
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MeasuringCountryRisk– GovernmentBondDefaultSpreads
Country Maturity US$Bondrate UST.Bond rate(samematurity) DefaultSpreadArgentina 10years 6.81% 2.45% 4.36% Brazil 10years 5.08% 2.45% 2.63% Chile 10years 3.14% 2.45% 0.69% Colombia 10years 3.84% 2.45% 1.39% Indonesia 10years 3.99% 2.45% 1.54% Mexico 10years 4.16% 2.45% 1.71% Peru 10years 3.34% 2.45% 0.89% Russia 10years 4.27% 2.45% 1.82% Ukraine 10years 8.44% 2.45% 5.99% Venezuela 10years 21.91% 2.45% 19.46%
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MeasuringCountryRiskwithSovereignCDSSpreads
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BeyondDefaultRisk– CountryRiskScores
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MeasuringCountryERP
¨ Therearemanywhousecountrydefaultspreadsasaproxyfortheadditionalriskthatyouwoulddemandforinvestinginequityinthatcountry,addingitontoabaseequityriskpremium(ERP)thattheyhaveestimatedforamaturemarket(usuallytheUS).¤ ERPforCountryA=ERPforUS+DefaultSpreadforCountryA
¨ IuseavariantwhereIadjustthedefaultspreadfortheadditionalriskofequity:
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MovingontoEquityRisk
Aswath Damodaran
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EquityRiskPremiumsinJanuary2017
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FromCountrytoCompanyRisk
¨ Theonepredictionthatwecanalsosafelymakefornextyearisthatjustaswehaveeachyearsince2008,therewillbeatleastoneandperhapseventwomajorshockstotheglobaleconomicsystem,precipitatedbypoliticsorbyeconomicsorboth.
¨ Thoseshocksaffectallmarketsglobally,buttodifferentdegreesanditbehoovesustonotonlybeawareoftheimpactaftertheyhappenbutbeproactiveandstartbuildingintheexpectationthattheywillhappenintoourrequiredreturnsandvalues.
¨ Inshort,wenolongerhavetheluxuryofbeingjustdomestic-marketfocusedevenifeverycompanythatweinvestinisjustadomesticcompany.