Cost of capital study 2023

The global economic and capital markets are characterised by increasing uncertainty. In the 18th edition of our cost of capital study, you can find out how this development is affecting business models and return expectations. More than 320 companies provide information and share their experiences.

The study under the motto "Unpredictability is on the rise! - Interest rates too? What are the causes, what are the symptoms?" examines, among other things, the influence of increased uncertainty and accompanying interest rate and inflation developments on business models, planning calculations and long-term return expectations (cost of capital) based on industry-specific analyses.

A total of 322 companies took part in this year's cost of capital study. Of these, 240 companies are based in Germany, including 65 per cent of DAX 40 companies and 46 per cent of MDAX companies. This emphasises the high practical value of the annual cost of capital study for companies.

Following a slight increase in the weighted average cost of capital (WACC) in the previous year from 6.6% to 6.8%, a significant increase to 7.9% was observed in the current reporting year (30 September 2022 to 30 June 2023). This increase is also reflected in the individual sectors.

In the current reporting period - as in the previous year - the highest weighted average cost of capital was recorded in the Technology (9.2 per cent), Automotive (8.3 per cent) and Industrial Manufacturing (8.1 per cent) sectors. This continues to affect those sectors in which political requirements and technology-related changes to business models have a particular impact.

Compared to the previous year, the most significant increases in the WACC can be observed in the Real Estate (+ 1.7 percentage points), Media & Telecommunications (+ 1.3 percentage points) and Consumer Markets (+ 1.3 percentage points) sectors. By contrast, no sector recorded a decline in the WACC.

A medium-term analysis of the major regional economic areas to forecast their future economic developments is becoming increasingly complex due to the many crises, such as the Covid-19 pandemic, geopolitical tensions and environmental challenges, as a large number of special effects occur, some of which overlap.

Other key topics of the study:

• Growing divergence? Hypotheses on the different development of global economic areas
• Inflation unleashed? The interaction of central banks with the capital markets
• Navigating increasing uncertainty? Development of expected returns in turbulent times
• The aspect already described in previous issues of our cost of capital study, namely that the global economy continues to develop in a state in which new crises emerge before the effects of previous crises have been resolved, has tended to intensify. Negative effects can therefore increasingly accumulate. The result is growing macroeconomic uncertainty.

Around 70 per cent of the participating companies stated that economic uncertainty has a negative impact on their business planning. However, the majority of participating companies do not see this as a reason to change the planning process.

Inflation rates at record levels have recently contributed to general economic uncertainty. In the current period under review, the majority of participating companies expect company-specific inflation rates that are significantly above the European Central Bank's medium-term, consumption-oriented inflation target of 2.0 per cent.

The main reasons cited for this are higher energy prices, shortages of raw materials and geopolitical crises such as the Russian war of aggression against Ukraine. It can be seen that short-term inflation expectations are declining in the meantime, while long-term inflation expectations - measured against the central banks' inflation target of 2.0 per cent - are consolidating at a significantly higher level.

In recent years, the relevance of ESG for the future business development of companies has steadily increased. Compared to the previous year, however, the importance of ESG has decreased slightly in most industries, particularly in the automotive sector. It remains to be seen whether other topics are currently taking centre stage due to the various crisis situations or whether the decline is due to measures that have already been implemented.