We use two different concepts for thinking about cost of equity and other capital:
- A stipulated level of cost of equity, to reflect, on a subjective level, desired future returns and valuation levels consistent with these.
-
A price-implied cost of equity over time, to quantify market moods and for use, together with realized or implied volatility levels, in analyzing risk return trade-offs and alternatives.
The recent average market-implied cost of equity for selected GLOBAL financials (top 100) and for selected REGIONAL subsets are given below:
Commentary
• Assuming future performance will follow an average cycle:
• The global industry CoE / expected return has risen by ~ 2% since 1/12007
• Both the U.S. and the European CoE / expected return have risen by similar amounts (2%), but the U.S. rate appears to be higher by 1.5%
• Looking at expected returns under consensus analyst projections, the European CoE / expected return seems higher; this discrepancy may be explained by European analysts not having sufficiently adjusted their projections downwards
• The Australian and Chinese CoE / expected return seem comparatively low and suggest (further) downside
• The Japanese CoE / expected return has fallen considerably
