Friday, August 28, 2009

Peru and Brazil

I just got back from my trip to Peru and Brazil. My first stop was Lima, and I had a blast. The people are friendly and hospitable, the weather is balmy and the food is extraordinary. While I have explored only a small sliver of the country, my impression of the Peruvian market is that it is commodity driven. As the price of copper and silver goes, so goes Peru's stock market. As a result, the market resembles a roller coaster. Peru has been among the best performing markets in recent years, as commodity prices have been on an up cycle. While I am not a pessimist by nature, it is inevitable that commodity prices will come down, and when they do, the market will reflect that fall. I hope that the Peruvian economy (and market) can use the surplus from the commodity boom to jump start other businesses - consumer products, technology or food (why not?).

I am more familiar with Brazil, this being my 15th trip to the country, and am always glad to see Rio (Sao Paulo, less so... the traffic drives me bonkers). I talked about the lessons that I have learned from the crisis for corporate finance and valuation. The presentation I used is available online on my website at:
Since this will be the genesis of my next book, your comments will be appreciated.


Johnny said...

Hye Prof Damodaran

It would very useful if u can reply the previous thread comments?


eran said...

Hi prof.

Would love to hear your take on choosing YTM as cost of debt. For declining companies, is it consistent with assuming a debt-beta of zero? Also, what about Bankruptcy Risk? taking it into account should decrease the cost of debt because at the same market price for the bond you get lower return (assuming there's some chance that coupons will not be paid in fully, depending on the recovery rate you'll use).

Unknown said...

I think bankruptcy risk would drive the market price down, so the return won't be lower.

Sampat Jain said...


Just a query, if the commodity market are on an upside, why is Indian companies who's performance would largely depend on commodities price, aren't doing good.

Awaiting your reply

Aswath Damodaran said...

Here is the problem. For commodity companies to make money from rising commodity prices, they have to be able to pass that price increase on to their customers. Indian oil companies, for instance, have to charge prices set by the government. Since the government does not want the users of gasoline (who vote) to face higher prices, they did not let oil companies pass the price increases through. Since these oil companies had to buy the oil from other countries, they got squeezed.

Теймураз Теймуразович Вашакмадзе said...

Prof. Damodaran,

I have looked through your presentation. On slide 29 you give framework for picking the right risk free rate.
Hence, I have several comments:
1) don't you think that there should be used only 5 government bonds as risk free rate:
- US 10 year bond YTM if calculations are in USD
- Germany of France 10 year governement bonds YTM if calculations aare made in EUROS
- UK 10 year governement bonds YTM if calculations are made in pounds
- Japan 10 year government bonds YTM if calculations are in yens
- Swiss 10 year governemnt bonds if calculationsare in Swiss francs
2) If calculations are made in local currency that its better to use e.g. US 10 year governemnt bonds adjusted to long term inflation expectations of local currency and USD.
3) If you take governemtnt bond in local currency which have local currency rating and substract default spread there is probability that rate will be still higher.
4) Do you really think that we shall use as risk free government bonds of developing countries? Don't you think that nowadays investor can easily purchase us governement bond which is probably less risky than for example turkish bond - default spread?
5) I think ERP is showing all the risk assets have in developing markets.

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