According to the weekly report of the Institute of International Finance (IIF), the Covid-19 outbreak is causing historic pricing in global share markets.
Accordingly, while Covid-19 caused a 20 percent loss of value in global share markets in the first quarter of 2020, the market value of traded companies lost more than 18 trillion dollars and fell below 70 trillion dollars.
Although recent losses have been partially compensated by the expansionary monetary and fiscal policies implemented especially in the last two weeks, the ongoing uncertainties due to Covid-19 cause excessive volatility to continue in all asset prices.
While uncertainties about how long the epidemic will last are currently estimated to lead to a 10 percent decrease in private sector revenues globally, these estimates vary, including 5 percent in China and 25 percent in Latin America.
In the downward revisions made since the beginning of the year, it is estimated that company revenues will decrease by 7 percent in Japan and 8 percent in the USA, while there may be a loss of 12 percent in the Eurozone and 13 percent in Canada.
Analysts are lowering their forecasts for a decline in company revenue at a much faster pace than during the 2008 financial crisis.
CAPE rates are at historic lows almost worldwide
Due to the uncertainties about the path the epidemic will follow, valuing stocks with traditional valuation models and finding the fair value of a share is becoming increasingly difficult.
Taking this situation into consideration, IIF states in its study that the periodically adjusted price/earnings ratio (CAPE) will help relatively healthier pricing.
CAPE, which became widespread after Nobel Prize winner Robert J. Shiller used it in valuation calculations, is obtained by dividing the average real return of a stock over the last 10 years by the stock price, thus aiming to make inflation-adjusted data more reliable. A low CAPE indicates that the stock is trading at a discount, that is, below its real value.
While the CAPE ratios of companies traded in the US stock markets fell below the 2015-2019 average with the decrease in March, they are well above the 2008-2009 levels. IFF reminds that it took 4 years in the USA to reach the levels of 2008-2009.
Eurozone companies appear to be at a 40 percent discount to their US counterparts
The CAPE ratio is at historical lows in companies traded in Germany, France and developing country share markets. While companies in Germany and France have fallen to the same level as during the 2008 global financial crisis, Eurozone companies appear to be at a 40 percent discount to their US counterparts.
On the other hand, the high CAPE ratios observed in the Spanish and Italian share markets indicate that these markets are still overvalued and bring with them the risk of possible price volatility.
Portfolio outflows in developing countries due to the epidemic cause companies in these regions to experience the most discounted period in history compared to US companies. Companies in developing countries appear to be 65 percent cheaper compared to US companies.
High indebtedness poses a risk for low- and middle-income countries
IIF points out that although many low- and middle-income countries have applied to the International Monetary Fund (IMF) to combat the effects of Covid-19, the CDS premiums of these countries have increased significantly recently.
Since 25 percent of the foreign debt of many low- and middle-income countries is under government guarantee, the borrowing costs of these countries seem to have increased significantly compared to the last 10 years.
While it is estimated that locals living in foreign countries will provide less cash flow as global commercial activity slows down significantly, this reveals that these countries may experience dollar-based liquidity shortages.
Accordingly, 89 countries in this group need 180 billion dollars for government bonds and loan payments at the end of the year, while 65 percent of the debt composition of these countries under government and state guarantee consists of dollars.