Inflation growth and market decline: how it impacts business value

Since the beginning of this year, economic conditions have changed.

If after 2020 the Kazakhstani and global economies were recovering from COVID-19 and showing positive forecasts, in 2022 the situation shifted due to global geopolitical events.

Since January this year, global stock markets have become more volatile. Investors have been trying to determine the scale and pace at which central banks would raise interest rates, but the surge in inflation continues to surprise, reaching a 30–40-year high in some countries.

In the United States, the expected inflation level forecasted last year exceeded analysts’ expectations this year. In June 2020, the expected long-term inflation rate in the US was 2.0%, but in May 2022 it reached 2.6%, according to Kroll.

Oleg Chesnokov, Director and Founder of PKF Valuation of Property, commented on how this could affect Kazakhstan’s economy:

“In Kazakhstan, according to EIU forecasts as of May 2022 and our calculations, the annual average geometric long-term inflation over a 10-year period is 5.15%, and over the period until 2050 it is 3.8%. These figures are key for valuing income-generating assets and businesses, as they are used when calculating discount rates and long-term growth forecasts to determine terminal value. When they increase, the cost of borrowed capital rises, which leads to higher capitalization and discount rates, and in turn reduces the value of assets and businesses. Stock markets have already responded to this phenomenon with a significant decline: the S&P 500 index fell by 23.4% from the beginning of the year to June 17, 2022, and over the same period the KASE index dropped by 26.6%.

Given the current decline in asset values and currency depreciation, there are also potential investment opportunities. PKF Valuation of Property can help make economically sound decisions by assessing the value of businesses and assets in light of the current situation.”