Cost of Capital Study 2023

The global economic and capital markets are characterized by increasing uncertainty. In the 18th edition of our Cost of Capital Study you will gain insights how this development is affecting business models and return expectations. More than 320 companies provide information and share their experiences.

The study entitled “Unpredictability on the rise! – Interest rates too? What are the drivers, what are the consequences?” examines the impact of increased uncertainties and accompanying interest rate and inflation developments on business models, corporate development and long-term return expectations (cost of capital), based on sector-specific analyses.

After a slight increase in the weighted average cost of capital (WACC) from 6.6 percent to 6.8 percent in the previous year, a significant increase to 7.9 percent can be observed in the current survey period (30 September 2022 to 30 June 2023). This increase is also reflected in the individual industries.

Similar to the previous year, the highest weighted cost of capital during the current survey period was observed in the Technology (9.2 percent), Automotive (8.3 percent), and Industrial Manufacturing (8.1 percent) sectors. Thus, it continues to concern industries where political requirements and technology-related changes to business models have a fundamental impact.

Compared to the previous year, the most significant increase in WACC was observed in the Real Estate (+1.7 percentage points), Media & Telecommunications (+1.3 percentage points), and Consumer Markets (+1.3 percentage points) sectors. However, no industry shows a decrease in WACC.

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

Further key topics are:

• Growing divergence? Hypotheses on the different development of global economic areas
• Inflation unleashed? Central Banks' interaction with capital markets
• Navigating increasing uncertainty? Development of market return expectations in turbulent times

The aspect already described in previous issues of our Cost of Capital Study – that the global economy continues to evolve in a state in which new crises emerge before the effects of previous crises have been resolved  - has tended to intensify. Negative effects may therefore accumulate increasingly. The result is increasing overall economic uncertainty. Around 70 percent of the participating companies have indicated 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 adjust the planning process.

Inflation rates at record levels have recently contributed to general economic uncertainty. In the current survey period, the majority of participating companies expect company-specific inflation rates significantly above the European Central Bank's mid-term consumer-oriented inflation target of 2.0 percent.

The main reasons for this are higher energy prices, scarcity of raw materials, and geopolitical crises such as the Russian war against Ukraine. It is noticeable that short-term inflation expectations have declined in the meantime, but long-term inflation expectations – measured against the central banks' inflation target of 2.0 percent  - have solidified at a significantly higher level.

In recent years, the relevance of ESG issues for companies' future business development has steadily increased. Compared to the previous year, however, the importance of ESG issues has decreased slightly in most industries, especially in the Automotive sector. Whether other topics are currently in the foreground due to the various crisis situations or whether the decline is due to measures already implemented remains to be seen.

In total, 322 companies participated in this year's Cost of Capital study. Of the participating companies, 240 are based in Germany, including 65 percent of the DAX-40 companies and 46 percent of the MDAX companies. The response rate of companies underlines the practical relevance of our annual Cost of Capital Study.