Cost of Capital in the
Current Environment
Global Economic and Financial Market Trends
January 2023 Update

Foreword
Dear Readers,
We are pleased to share the January 2023 update to our Cost of Capital in the Current
Environment – Global Economic and Financial Market Trends Report. This report provides
data and insights used to support Kroll’s Recommended Equity Risk Premia and Normalized
Risk-free Rate guidance for a variety of countries.

Carla S. Nunes, CFAManaging Director
Kroll, LLC

In 2022, global equity markets suffered their worst annual performance since the 2008 global
financial crisis, weighed down by record-high inflation, the Russia-Ukraine war, and China’s
zero-COVID-19 policy. Major central banks have raised interest rates at a brisk pace during2022, and rate hikes are not yet over. Economists have slashed real economic growth
projections for 2023 relative to a year ago. However, some sprouts of optimism are emerging.
Inflation may have peeked, a warm winter in Europe has kept a lid on energy prices, China has
ended its zero-COVID-19 policy, and consumer spending is showing some resilience. Global
financial markets are starting to believe that the U.S. and the eurozone may be able toescape recession in 2023. Amidst this highly uncertain environment, cost of capital inputs
rose during 2022, but may soon stabilize if major central banks manage to achieve a softlanding in their economies.
This report contains valuable insights on long-term inflation expectations, the balance sheet
size of major central banks, stock market performance—along with related volatility measures— credit spreads, unemployment rates, consumer and business confidence indicators, andreal GDP growth estimates for seven regions, including Canada for the first time.
We hope you find this report helpful in understanding some of the ingredients used to arriveat Kroll’s cost of capital guidance. If you would like to receive further information or discuss
any of the findings, please contact us.
Sincerely,
Carla Nunes

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Global Cost of Capital Inputs – U.S. and Eurozone
Data as of January 17, 2023

These are our latest equity risk premium
recommendations for the U.S. and the eurozone(from a German investor perspective), along withaccompanying risk-free rates.
• Normalized risk-free rates have increased in 2022 aslong-term inflation expectations kept rising due tovarious factors (see next page).
• Equity risk premiums are still higher relative to ourrecommendations prior to the outbreak of COVID-19
in March 2020.

*

We recommend using the spot 20-year U.S. Treasury yield as the proxy for the risk-free rate, if the prevailing yield as of the valuation date is higher than ourrecommended U.S. normalized risk-free rate of 3.5%. This guidance is effective when developing USD-denominated discount rates as of June 15, 2022, and thereafter.

**

We recommend using the spot 15-year German government bond yield as the proxy for the risk-free rate, if the prevailing yield as of the valuation date is higher than ourrecommended German normalized risk-free rate of 3.0%. This guidance is effective when developing EUR-denominated discount rates as of October 18, 2022, andthereafter.

*** German normalized risk-free rate and eurozone equity risk premium (ERP) for use in EUR-denominated discount rates from a German investor perspective. Our current
ERP recommendation is at the top of the range. Additional country risk adjustments may be warranted when estimating discount rates for other countries in the
eurozone.
For more information, visit: kroll.com/costofcapitalnavigator
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Long-Term Inflation Expectations (Median)
Data as of January 1, 2023

Although at a slower pace, major central banks are continuing to raise interest rates to tame high inflation, which reached levels
not seen in 30 to 40 years in some countries (a 70-year record high for Germany). Inflation appears to have peaked at the tailend of 2022, which led financial markets to hope that interest rate hikes will stop sometime in 2023. Long-term inflation
expectations have also come down in the U.S. relative to just a few months ago. However, Germany was historically very
dependent on energy sourced from Russia prior to the war on Ukraine. While a warmer winter in Europe and some stabilizationof natural gas prices have contributed to a slowdown in German inflation, the country’s high exposure to energy pricefluctuations means that long-term inflation expectations remain high.

Sources of underlying U.S. data: Blue Chip Economic Indicators, Blue Chip Financial Forecasts, Consensus Economics, IHS Markit, Federal Reserve Bank of Cleveland, Federal
Reserve Bank of Philadelphia (Aruoba Term Structure of Inflation Expectations, Livingston Survey, and Survey of Professional Forecasters), Oxford Economics and the
University of Michigan’s Surveys of Consumers Inflation Expectations.
Sources of underlying German data: Consensus Economics, Economist Intelligence Unit, IHS Markit, International Monetary Fund, Oxford Economics and PwC.
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Global Cost of Capital Inputs – Other Countries
Data as of January 17, 2023
This is the latest Kroll risk-free rate guidance for the UK, Canada and Australia. We are happy to share our guidance forAustralia for the first time. While we have conducted this analysis internally at Kroll, we had not previously shared our
guidance in external publications.

UK ††Normalized
Risk-Free Rate(in GBP)

Higher of
4.0% or Spot‡

Canada ††(in CAD)

Higher of
3.5% or Spot§

Australia ††(in AUD)

Higher of
3.5% or Spot#‡ We recommend using the spot 20-year UK Gilt yield as the proxy for the risk-free rate, if the prevailing yield as of the valuation date is higher than our recommended UK
normalized risk-free rate of 4.0%. This guidance is effective when developing GBP-denominated discount rates as of October 18, 2022, and thereafter.
§ We recommend using the spot Government of Canada Benchmark Long-Term Bond yield as the proxy for the risk-free rate, if the prevailing yield as of the valuation date ishigher than our recommended Canada normalized risk-free rate of 3.5%. This guidance is effective when developing CAD-denominated discount rates as of October 18, 2022,
and thereafter.
# We recommend using the spot 10-year Australia Commonwealth Government Bond yield as the proxy for the risk-free rate, if the prevailing yield as of the valuation date ishigher than our recommended Australia normalized risk-free rate of 3.5%. This guidance is effective when developing AUD-denominated discount rates as of October 31,
2022, and thereafter.
†† Although currently we do not have an official Kroll Recommended ERP for the UK, Canada and Australia, historical and other forward-looking ERP information for thesecountries is available in the International Cost of Capital module within the Cost of Capital Navigator.

For more information, visit: kroll.com/costofcapitalnavigator
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Total Assets Held by Central Banks Over Time
Data as of January 17, 2023
After COVID-19 was declared a pandemic, major central banks implemented quantitative easing (QE) policies that entailed
massive purchases of securities at an unprecedented pace. The swelling size of their balance sheets, which primarily comprised
government debt securities, contributed to keeping interest rates at historically low levels in most developed markets. Recent
inflationary pressures have finally led some central banks to raise policy interest rates, begin unwinding asset purchase programs
and reduce the size of their balance sheets (quantitative tightening). However, over the next two years, the combined balance
sheet of these central banks will remain significantly larger than pre-pandemic levels.

Sources: Capital IQ, FRED® Economic Data, Bank of England, Bank of Japan and European Central Bank
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Global 10-Year Government Bond Yields
Data as of January 17, 2023

U.S.

CanadaBrazil2.85%

12.51%

EurozoneGermany

2.09%

Netherlands

France

Spain

Italy

2.19%
2.52%

3.07%

3.85%

UK

Switzerland

1.13%

Sweden

1.84%

China

India

Japan

Asia
Pacific

Eurozone

3.53%

Europe –Other

AmericasLong-term interest rates are still at relatively low levels in developed markets from a historical perspective. However, the recent
surge in inflation began impacting short- and long-term interest rates. The European Central Bank embarked on a path to control
inflation by raising interest rates for the first time in 11 years and ending net purchases under QE programs. Central banks in the
U.S., Canada, Sweden, Switzerland and the UK have also begun their interest rate normalization process. The Bank of Japan
increased its target 10-year yield to a range of 0.25% to 0.50%, but more changes may be in store as a new governor takes thehelm at the bank.

3.35%

2.40%

2.85%

7.33%

0.51%

Australia

Singapore

South Korea

3.61%

2.89%

3.45%

Sources: Refinitiv (Brazil, India), European Central Bank (eurozone aggregate yield) and Capital IQ (other countries)
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Stock Market Performance
Data through January 17, 2023

The S&P 500 was the second worst-performing index since 2022 began, as investors tried to ascertain the impact of risinginterest rates on company (equity) values. China was the worst-performing market, but the end of its zero-COVID-19 policy has
improved the outlook significantly for 2023. Inflation appears to have peaked at the tail end of 2022, which led global financial
markets to hope that interest rate hikes will stop sometime in 2023.

Source: Capital IQ*The first lockdown due to COVID-19 began on January 23, 2020, in Wuhan, China.
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Global Market Volatility
Data as of January 17, 2023
U.S. and European financial markets experienced significant volatility during 2022, as increased uncertainty related to the impact
of inflationary pressures on central banks’ plans to raise interest rates and the Russia-Ukraine war led to fears of stagflation.
Despite the still-uncertain environment, in early 2023 we are seeing some optimism in markets, with U.S. and European volatility
indices now below their long-term average.

Sources: Capital IQ, FRED® Economic Data and Morningstar Direct
Long-term averages are based on 1995 to present for VIX daily series and 1999 to present for VSTOXX daily series.

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9Global Credit Spreads
Data as of January 17, 2023
Thanks to the inclusion of corporate debt in the Federal Reserve and European Central Bank asset purchase programs, as wellas investor perception that these central banks will act as a lender of last resort, U.S. and European corporate debt spreads
between high-yield and investment-grade bonds have stayed at historical lows. Towards year-end 2022, credit spreads
widened, as interest rates began to rise. However, spreads have narrowed again in early 2023 and are below long-term
averages.

Sources: Capital IQ, FRED® Economic Data and Morningstar Direct
U.S. corporate credit spreads are based on the difference in effective yields between the ICE BofA U.S. High Yield Index and the ICE BofA U.S. Corporate Index. Eurodenominated corporate credit spreads are based on the difference in effective yields between the Bloomberg Barclays Pan-European High Yield Index (EUR) and theBloomberg Barclays Euro Aggregate Corporate Bond Index. Long-term averages are based on 1996 to present for U.S. credit spread daily series and 1998 to present for
EUR-denominated credit spread monthly series.
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10Real GDP Growth (%) Estimates (Median)
Data as of January 17, 2023

Global economic recovery from the pandemic was cut short in 2022. The Russia-Ukraine war, global supply chain disruptions,inflationary pressures and a zero-COVID-19 policy in China created the specter of stagflation in some countries and regions.
Economic growth projections for 2023 have been significantly downgraded relative to a year ago.

WORLD

2021

6.0
2022

3.0
2020

2024

2023

1.7

2.7

-3.2

Sources: OECD, International Monetary Fund, World Bank, Blue Chip Economic Indicators, Consensus Economics, Economic Intelligence Unit, Fitch Ratings, IHS Markit, Oxford
Economics and S&P Global Ratings
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11Real GDP Growth (%) Estimates (Median)
Data as of January 17, 2023

U.S. economic growth projections for 2023 have been revised down significantly relative to a year ago. The labor market
continues to be tight, putting pressure on wage growth. The Fed has embarked on an aggressive path of interest rate hikes in
an attempt to tame inflation and cool down the economy. The Fed is attempting to achieve a soft landing, but an overshootcould potentially lead to a recession. Economists are divided on whether we will see a recession in the second half of the year,
but the expectations are that even if we do see one, it will not be very deep and it will not last long. Real growth for 2024 is
projected to be below potential for the U.S. economy.

2021

5.9

U.S.

2022

2020

-2.8

2024

1.9 2023 1.4
0.5

Sources: OECD, International Monetary Fund, World Bank, Blue Chip Economic Indicators, Consensus Economics, Economic Intelligence Unit, Fitch Ratings, IHS Markit,
Moody's Analytics, Oxford Economics and S&P Global Ratings
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12Real GDP Growth (%) Estimates (Median)
Data as of January 17, 2023

Canada inflation reached a 40-year high in 2022, with price increases being broad based. This led the Bank of Canada toundertake aggressive interest rate hikes. Real GDP growth is forecast to moderate in 2022, but still at a much stronger pace thanthe U.S., its main trading partner. The increase in crude oil prices after Russia’s invasion of Ukraine benefitted Canadian exports.
Nonetheless, higher interest rates are expected to weigh on growth towards year-end. This, combined with other factors, point
to a possibility of a recession in 2023.

2021

5.0

CANADA

2022

3.4
2020

-5.2

2023

2024

0.6 1.6

Sources: OECD, International Monetary Fund, World Bank, Blue Chip Economic Indicators, Consensus Economics, Economic Intelligence Unit, Fitch Ratings, IHS Markit, Oxford
Economics and S&P Global Ratings
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13Real GDP Growth (%) Estimates (Median)
Data as of January 17, 2023

After a strong recovery in 2021, the eurozone saw a significant downward revision in growth in 2022, thanks in good part tothe uncertainty created by the Russia-Ukraine war. Commodity price increases since the war began and the eurozone's
significant energy dependence on Russia have led to record-high inflation for the common-currency area, while weighing down
growth prospects. The European Central Bank has signaled that interest rates will continue to rise. A warmer winter in Europe
and a successful replenishing of natural gas stocks have raised hopes that the eurozone may escape recession in 2023.
However, there is very little room for policy errors.

2021

5.3

EUROZONE

2022

3.3
2020

-6.3

2024

2023

0.0

1.5

Sources: OECD, International Monetary Fund, World Bank, Blue Chip Economic Indicators, Consensus Economics, Economic Intelligence Unit, Fitch Ratings, IHS Markit, Oxford
Economics and S&P Global Ratings
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14Real GDP Growth (%) Estimates (Median)
Data as of January 17, 2023

A surge in inflation in 2022 has lowered consumer purchasing power and dimmed UK’s growth outlook. The UK economy isvulnerable to spill-over effects from the Russia-Ukraine war, particularly due to rising energy prices and supply chain disruptions.
The Bank of England has been raising interest rates at a rapid pace, and markets went through a turbulent period in September
and October, seeing two new prime ministers in a short period of time. Economists believe that the UK economy will not escaperecession in 2023, and growth is expected to be anemic in 2024.

2021

7.5

UK

2022

4.3
2020

-11.0

2024

-1.0 0.82023

Sources: OECD, International Monetary Fund, World
Bank, Blue Chip Economic Indicators, Consensus
Economics, Economic Intelligence Unit, Fitch
Ratings, IHS Markit, Oxford Economics and S&P
Global Ratings

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Real GDP Growth (%) Estimates (Median)
Data as of January 17, 2023

Real GDP growth in 2022 was the second worst in decades (after the low in 2020), as a resurgence of COVID-19 cases andChina’s zero-COVID-19 policy translated into lockdowns in many cities and ports. These measures weighed on economic
activity and contributed to further bottlenecks in global supply chains. With an end to the zero-COVID-19 policy, the outlook for2023 has brightened, but real GDP growth is still expected to be below the nearly 6% (and higher) level the economy enjoyedfor many years.

CHINA

2021

8.1
2023

2020

2.2

2022

3.0

2024

4.6 4.8

Sources: OECD, International Monetary Fund, World Bank, Blue Chip Economic Indicators, Consensus Economics, Economic Intelligence Unit, Fitch Ratings, IHS Markit, Oxford
Economics and S&P Global Ratings
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16Real GDP Growth (%) Estimates (Median)
Data as of January 17, 2023

India saw an impressive rebound from the pandemic in 2021. However, real growth in 2022 decelerated as rising global foodand energy prices impacted the Indian economy negatively. Growth expectations for 2023 were downgraded substantially froma year earlier.

2021

8.7

INDIA

2022

6.9

2024

2023

5.7

6.6

2020

-6.6

Sources: OECD, International Monetary Fund, World
Bank, Blue Chip Economic Indicators, Consensus
Economics, Economic Intelligence Unit, Fitch
Ratings, IHS Markit, Oxford Economics and S&P
Global Ratings

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U.S. vs. Eurozone Unemployment Rate

Data as of January 2023

The U.S. unemployment rate is now back to pre-pandemic
levels, matching multi-decade lows. The U.S. is still seeing
pockets of labor shortages in a variety of industries,
although layoffs in tech and some other industries havebegun. The eurozone’s unemployment rate is now lower
than the level registered in March 2020.

Source: U.S. Bureau of Labor Statistics and Eurostat* Data through December 2022 for the U.S. and November 2022 for the eurozone.
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U.S. and Eurozone
Consumer Sentiment vs. Business Confidence
Data as of January 17, 2023
Consumer sentiment declined dramatically in the U.S. and eurozone, with a rise in inflation creating anxiety about the future.
Consumer confidence is now lower than at the height of the COVID-19 crisis in both geographies. In contrast, business
confidence in the U.S. is about the same as prior to the pandemic, while the eurozone is now higher.

* Data only available for December 2022
Sources: Michigan University’s Index of Consumer Sentiment, OECD’s Business Confidence Index and European Commission business and consumer surveys (The same
methodology that the European Commission uses to standardize its Economic Sentiment Indicator [ESI] was applied to the Eurozone Consumer Confidence and BusinessClimate Indicator series.)
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For more information, please contact:
Carla S. Nunes, CFA

Kevin Madden

carla.nunes@kroll.com

kevin.madden@kroll.com

Managing Director
Kroll, LLC

Director
Kroll, LLC

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional
judgment. Whilst due care has been taken in the preparation of this document and information contained herein, Kroll does not accept any liability whatsoever for any direct or consequential loss
howsoever arising from any use of this document or its contents or otherwise arising in connection herewith.

A b o u t V a l u a ti o n D i g it al S o l u t i o n s
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