(A Review of Aswath Damodaran Paper Dated April 2024)
The recent wave of global tariff announcements has sent shockwaves through financial markets, with equity values plummeting and volatility surging across sectors. Aswath Damodaran, a leading authority on valuation, offers a timely and sobering perspective on the implications of such shocks, not just for global investors but also relevant to Australian business owners, advisors, and valuation professionals seeking clarity in uncertain times.
What Do Tariff Shocks Mean for Markets?
Damodaran’s analysis underscores a classic crisis cycle: a sudden trigger (tariffs), rapid asset repricing, ripple effects through the real economy, and a protracted reset period. In the immediate aftermath, global equity markets experienced sharp declines, with some sectors, such as energy, losing over 14% of their market capitalisation within days. Notably, the market’s reaction was broad-based, with little distinction between “safe” and “risky” stocks, indicating a fundamental reappraisal of global economic prospects.
During the initial days of the crisis, Damodaran observed a rare phenomenon: stocks, bonds, and gold all rose in tandem, reflecting heightened uncertainty and a scramble for perceived safety. The equity risk premium (ERP)—a key measure of the return investors demand for holding equities over risk-free assets—spiked sharply, signalling a rapid reassessment of risk. In practical terms, this means that the cost of capital has increased, and asset values have decreased.
The Real Economy: Near-Term and Long-Term Effects
For the real economy, Damodaran warns of a likely slowdown. Tariff-induced price increases are expected to dampen demand, while heightened uncertainty could stall investment and hiring. The risk of recession rises in the near term, as evidenced by steep declines in commodity prices and the tightening of credit spreads. Over the longer term, the global economic “pie” may shrink, with supply chains disrupted and old alliances restructured, leading to a more challenging environment for businesses that rely on international trade and investment.
Australian Business Valuation: Navigating the New Landscape
For Australian SMEs and their advisors, these global developments are not merely academic. The volatility and uncertainty unleashed by tariff shocks have direct implications for business valuation:
- Discount Rates and Risk Premiums: The spike in ERP and bond spreads means higher discount rates, which in turn lower the present value of future cash flows. Valuations must be recalibrated to reflect this new risk environment.
- Market Multiples: Sharp declines in market capitalisation and sector-specific shocks (e.g., energy, manufacturing) will affect the comparables used in market-based valuation approaches. Careful benchmarking and sector analysis are essential
- Cash Flow Projections: With the real economy facing a potential slowdown, forecasts of revenue, margins, and growth must be stress-tested for downside scenarios. Sensitivity analysis becomes indispensable.
- Compliance and Defensibility: In times of turmoil, the need for transparent, IVS-compliant valuation reports is paramount. Lenders, business buyers, and courts will scrutinise assumptions and methodologies more closely than ever.
At Negotia Group, we pride ourselves on our rigorous adherence to International Valuation Standards (IVS) and our commitment to delivering valuations that withstand scrutiny, no matter how turbulent the market environment may be. Our approach combines deep sector expertise, advanced analytics, and a personalised understanding of each client’s unique circumstances.
A Final Thought: Finding Opportunity Amidst Uncertainty
While Damodaran cautions that the near-term outlook is fraught with risk, he also reminds us that market crises can create opportunities for those who are prepared. For business owners considering succession, sale, or acquisition, now is the time to ensure your valuation is robust, defensible, and tailored to the realities of a changing world.
Are you confident your business valuation reflects today’s risks—and tomorrow’s opportunities? If you seek clarity, compliance, and strategic insight, contact Kevin Lovewell directly on 0401 308 385. Discover how Negotia Group can help you navigate market turmoil with confidence and precision.
