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.