Newsletter 6

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Newsletter, May 8, 2020

Central banks look for fiscal aid

The world has entered a period of enhanced stagnation in the best-case scenario. GDP growth in 2019 was around 3% and was projected to be 3.30% in 2020. Post the COVID outbreak, growth projections have been now placed in sharply negative territories. These expectations are the direst since the financial crisis of 2008 and have caused concern all around the globe. Apart from the expected economic slowdown, there are more issues of concern such as trade disputes, mainly the US – China trade war, geopolitical tensions and widespread uncertainty which makes businesses reluctant to invest. Consequently, in order to address these issues and boost the economy, central banks seem to propose fiscal stimulus to complement their monetary policies. However, it would be wrong to assume that monetary policy has reached its limits. More specifically, governments can take advantage of the low-interest rates and invest in infrastructure and crucial sectors of the economy, like renewable energy and R&D projects. Furthermore, a coordinated response to this economic challenge, which is common action by central banks and governments, could limit uncertainty and thus facilitate private investing.

Inclusive economy and growth

Inclusive economy is an idea expressed very often by government representatives as a key modifier and a significant area of focus. Recently, the US administration talked about creating “the most inclusive economy ever to exist”. This idea means to have sustainable and inclusive societies, in which the economy works properly for all people. In this economy, all participants have the same opportunities and the same potential for advancement, being involved in the growth process themselves. There are no social class injustices and all people are valued regardless of race, ethnicity, sexual orientation, gender, or religion. In these conditions, the markets become not only more efficient, but there is wide support for market reforms and sustainable economic activities.

Key rates of central banks globally

In the face of the ongoing Covid-19 crisis, central banks around the globe have lowered interest rates in an attempt to stimulate financial activity. The Federal Reserve cut the federal funds rate to a range of 0 to 0.25 percent. In China, the Central Bank lowered the one-year loan prime rate from 4.05% to 3.85%, and the five-year rate from 4.75% to 4.65%. Bank of England reduced interest rates to 0.1% while the ECB kept its deposit rate at 0%. The Bank of Canada decreased the benchmark interest rate by 50 basis points to 0.25% while the Reserve Bank of Australia slashed the cash rate by 25 basis points to a record low of 0.25%. Finally, Japan kept its rates to -0.1% and Russia lowered its benchmark rate from 6% to 5.5%. The above moves are aimed at keeping the financial markets stable and lowering the borrowing costs for both businesses and households at a time where uncertainty is on the rise and economies rush toward recession.

Industry multiples in Europe and North America

Although the P/E ratio of most European, American and Canadian industries do not differ by more than 15%, the Energy Industry in Europe boasted a much higher P/E of 14.6x compared to 7.4x in the US and 10.8x in Canada. Additionally, Europe’s Health Care Industry had a higher valuation multiple than its counterparts, especially in the Pharmaceutical Sector in which the P/E multiple was 22.5x, almost double the 12.5x of the US’s. Furthermore, the Utilities’ P/E was estimated at 24.2x in the US, 17.1x in Canada and 19.5x in Europe, and the Banking Sector’s P/E at 13.3x in the US and 8.9x in Europe. However, the EV/EBITDA multiple might be more appropriate in comparing the non-financial industries’ performance internationally, as it is not affected by different tax regimes and accounting standards unlike the P/E. Therefore EV/EBITDA may present a more uniform performance among the geographies in question in the Pharmaceutical sector, as it was estimated at 13.5x and 11.9x in Europe and the US correspondingly, and in the Utilities Industry, as the multiple was 13.9x, 12.5x and 11.6x in the US, Canada and Europe respectively. This was also true for the Energy Industry, where EV/EBITDA was 8.3x in Europe, 7x in US and 5.6x in Canada.

Implied and Historical ERP

Uncertainty has increased market volatility and instability. The rise in safe-haven assets’ demand has led risk-free rates to new levels. On the 3rd of April, US 10Y and 30Y T-Bonds’ yield fell to 0.58% and 1.23% respectively. Under these unprecedented circumstances, it is preferred to calculate equity risk premium using implied ERP over the historical ERP; it is a forward-looking number and easily updated.

Recent Research Reports, Articles & Posts:

Companies recently followed by VRS: Equinix, Home Depot, BNP Paribas, Bank of America, PSE-AI, Boeing, ArcelorMittal, Fourlis, Profile, Oracle, Eurobank, National Bank of Greece, British Petroleum, RTL Group, Quest Group, BRIQ Properties, Alibaba, Piraeus Bank, Walt Disney, Epsilon Net, Microsoft, Alpha Bank, Jumbo, LVMH, Facebook, Exxon Mobil, Sarantis

Global Shipping Market Update

European SMEs

World Markets Valuation Multiples

Global Sectors Valuation Multiples

Greek Economy Quarterly Macro Note

Global Bond Markets Update

VRS Research Team explains the Dynamics of the Global Magnesium Market

VRS and Morningstar Partnership

The Instability of Melt-ups Blow-offs, The Case of TESLA Motors

Global Markets Update | Equities, Bonds, Currencies & Commodities

ESG in Corporate Valuation and Equity Research

ATHEX Real Estate Conference

VRS Research Team explains Valuation Multiples and IPOs in the Super-Yacht Industry

Analyzing and Valuing Media Companies

Corporate Deals Data Report, Greek Market, Period 2015 – 2018

Meeting Greek Listed Companies

Greece: Changing the narrative, October 2019

Bourse de Luxembourg

VRS Visits Euronext Brussels

(Newsletter continues)

Advisory services overtake audit at Big Four

When observing the allocation of fees within the Big Four auditors, a trend evolves showing that revenues generated from advisory services overtake those from audit services. Supportive data published in 2019 IAB World Survey, showed that Big Four’s audit services accounted for 35%, whereas advisory services represented 40% of the total turnover. Opposing this, in 2008, audit fees contributed with a share of 52% while advisory fees only with that of 24% to the total fee income. Simultaneously, according to a report in WSJ, global audit revenue growth since 2012 reached 3%, compared to global advisory revenue growth which reached 44%, thus marking a significantly higher growth rate. Further research demonstrates, in fact, that this trend represents most – if not all – sectors, with banking being an eminent example as fees derived from audit services there, represented only 13% of fees from advisory services.

Intellectual property’s impact on companies’ value

Market agents have started assessing IP as a potential value driver for investment. There are several reasons justifying this trend. Besides creating opportunities to increase future profitability, IP can be a source of additional income (i.e. licensing). Moreover, IP rights help maintain a competitive advantage; they allow companies to capitalize on creativity. Without IP protection, innovation would be quickly competed away by rival firms. Finally, IP can substantially raise the value of a company in the case of M&A or sale.

European macroeconomic policy in response to Coronavirus

Yields on government bonds, which have been an area of focus for some time in the Eurozone, and inflation seem to be the key to ease the economic consequences of the health crisis. More specifically, low yields are needed; this can be achieved through forward guidance and quantitative easing. Regarding inflation, it should be maintained at low levels. This goal is easy to achieve because of the slow growth trends currently prevailing amid the COVID impacted environment. Moreover, to ensure the frictionless function of the financial system, ECB should continue the banking deposits’ two-tier system, the easing of conditions for TLTROS and regulate over risk-taking. It should be mentioned that these extraordinary times call for common action; so at the same time governments could be greatly benefited by working together to create fiscal stimulus (i.e. Eurobonds).

The ongoing crisis and its potential to create a fiscal or financial crisis

COVID-19 is a deadly disease that has disrupted the global supply chain. As most of the experts say, the most probable scenario is that it will slash the global growth in half, leading many countries into outright recession. In order to prevent that, governments need to take action to halt the economic slump, by using monetary and fiscal policies. Regarding monetary policy, Quantitative Easing (QE) can help in reducing borrowing costs. Moreover, Money Financed Response Measures can shield the economy either via Money Financed Fiscal Programs (i.e. increased government spending or tax reductions) or more specific measures. For instance, FED’s Main Street Lending Program is purchasing up to 600$ billion in loans complementing the SBA’s Paycheck Protection Program which provides liquidity support. Concerning fiscal policy, in the Eurozone, governments could use Eurobonds, which will provide the necessary funds to members to withstand the effects of the pandemic. Governments should enact economic policies to enhance the liquidity of firms. To protect financially healthy firms from defaulting, banks should be more tolerant of firms by rolling over any existing loans as well as deferring the collection of taxes. Furthermore, stimulus packages should be added to the economy to satisfy the demand for credit and tone up the buying power of households.

Resilient and vulnerable sectors during the COVID-19 crisis

In the current crisis, many sectors have been affected in different ways. It seems that the most vulnerable ones are tourism, transportation and the retail sectors. According to UNWTO, international tourist arrivals in 2020 could decline by 20%-30%; this translates into a loss of 300-450 billion USD in the global tourism sector. Moreover, airline companies are on the verge of defaulting. Recently, UK airlines asked for immediate financial aid to survive the crisis. Likewise, retailers selling capital goods have seen the demand for their products sinking. However, there are some sectors that are more resilient. Health and hygiene sectors (i.e. cleaning agents’ manufacturers) have been greatly benefited in terms of sales increase. Additionally, retailers selling consumer goods such as drugstores, pharmacies, supermarkets and grocery stores have experienced great increases in demand for their products.

Previous Issues of VRS Newsletter:

Newsletter 1

Newsletter 2

Newsletter 3

Newsletter 4

Newsletter 5

Please note that this newsletter has been prepared with the valuable contribution of:


AUEB Students’ Investment and Finance Club  | LinkedIn: AUEB Students’ Investment and Finance Club
AUEBS’IFC is research partner of VRS.

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