Impact of Covid-19 on valuations and the valuation profession
As the world continues to grapple with the health and economic crises brought about by the Covid-19 pandemic, professional valuers are playing a key role in helping to stabilise, and bring confidence to business and financial markets.
With so many unknowns ahead of us, and with new policy and market-based developments announced on a daily basis, keeping abreast of the current state is vital for all valuers. In support of this, the IVSC’s Advisory Forum is convening a live forum of international experts on a bi-monthly basis to share the latest developments as they relate to valuations and the valuation profession.
Leading experts from Asia, Oceania, Europe, Middle East, and the Americas are providing regular updates on domestic policy direction, market sentiment and professional best practice in the context of the unwinding pandemic.
You can listen back to the latest set of presentations by clicking below. IVSC member and sponsor organisations are invited to register for future editions of these live sessions, including Q&As with the presenters, throughout 2021. Keep an eye out for further updates in eNews, or contact the IVSC by email at firstname.lastname@example.org to express your interest.
Valuation uncertainty Vs. Market Risk
Valuation uncertainty should not be confused with risk. Risk is the exposure that the owner of an asset has to potential future gains or losses. Risk can be
caused by various factors affecting either the asset itself or the market in which it trades. Examples include:
- for tangible assets reduction in market prices after the date of acquisition or valuation,
- a deterioration in the projected future income of a security,
- a loss of liquidity compared with other assets,
- costs for maintaining or developing an asset being higher than currently anticipated,
- the rate of an asset’s technical or physical obsolescence being higher than currently anticipated.
Such risks are taken into account by informed buyers/sellers when considering a bid for an asset and are balanced against the perceived advantages of ownership. Risk is therefore normally reflected in market prices.
Risk can often be quantified. For example, market risk can be measured by applying statistical techniques to previous patterns of price fluctuation, or by assuming different market scenarios to model different outcomes. Techniques for identifying risks and quantifying them are central to the various methods used to determine discount rates used in valuation.
While risk may be thought of as a measure of future uncertainties that may result in an increase or decrease in the price or value of an asset, valuation uncertainty is concerned only with uncertainties that arise as part of the process of estimating value on a specific date.
Valuation certainty and market risk are independent of each other. For example, a valuation of a highly liquid quoted stock has little uncertainty, but that stock may still be seen as carrying a high market risk.
Valuation uncertainty should not be confused with stress testing, i.e. measuring the impact on a current price or value of a specified event or series of events.
Valuation uncertainty can be caused by various factors. These can be broadly divided into the following categories:
- market disruption,
- input availability,
- choice of method or model.
These causes of valuation uncertainty are not mutually exclusive. For example, market disruption may affect the availability of relevant data which, in turn, may create uncertainty as to the most appropriate method or model to use. Interdependence and correlation between the causes of uncertainty are therefore likely to exist and account should be taken of this during the valuation process.