Recessions are not created equal.
They may be global in narrative, but their impact on valuations varies dramatically between emerging and developed economies.
In boardrooms from Johannesburg to New York, the same macroeconomic event can result in very different outcomes, driven by capital access, investor behaviour, market liquidity, and sovereign risk.
Let’s unpack how recessions influence business valuations in these two contexts – and what professionals should be watching for.
- Access to Capital: Flight to Safety vs. Capital Outflow
Developed markets tend to see a “flight to safety” during recessions. Investors reallocate capital toward US Treasuries, gold, and large-cap defensive stocks. While risk assets do lose value, there’s often a baseline of local capital still circulating.
Emerging markets, however, often face capital flight. Investors, particularly foreign institutions, pull funds rapidly due to currency risk, political instability, and weaker credit ratings. This sudden outflow can:
- Spike local interest rates
- Devalue currencies
- Trigger liquidity traps
Valuation Impact: Higher discount rates and reduced access to growth capital weigh heavily on emerging market valuations.
- Currency Volatility and Inflation Pressure
Developed economies often have stronger institutions and central banks with more credibility, allowing them to respond decisively with interest rate cuts and stimulus.
Emerging markets are often import-reliant and debt-heavy in foreign currency, so recessions usually coincide with:
- Exchange rate depreciation
- Imported inflation
- Difficulty servicing USD or EUR-denominated debt
Valuation Impact: Forecasted earnings in local currency may be lower in real terms, while the cost of capital soars. DCF valuations suffer on both ends: reduced cash flow and a higher WACC.
- Market Liquidity and Comparable Multiples
In developed economies, even in downturns, M&A activity, secondary markets, and capital markets remain functional, albeit muted. There are more valuation benchmarks, sector data, and deal comps available.
In emerging markets, the pool of recent transactions and listed comparables shrinks, making it harder to benchmark fair value reliably.
Valuation Impact: The lack of liquidity and visibility increases valuation uncertainty. Professionals must rely more on fundamentals and subjective adjustments like DLOM (“Discount for Lack of Marketability”).
- Government Response and Policy Tools
Developed economies often respond with:
- Quantitative easing
- Large-scale stimulus
- Coordinated central bank action
Emerging economies are typically more constrained. Too much intervention can trigger inflationary pressures and weaken the currency. Policy levers are limited.
Valuation Impact: In developed markets, stimulus can buoy valuations despite economic contraction. In emerging markets, recovery may lag, placing downward pressure on medium-term value.
- Structural vs. Cyclical Challenges
A final distinction lies in the depth of vulnerability. Developed markets usually face cyclical downturns – industries slow, then rebound. Emerging markets often battle structural issues during recessions, such as:
- Power shortages
- Governance and corruption risks
- Reliance on commodity exports
Valuation Impact: In emerging markets, a recession might reset valuations lower for longer, while in developed markets, recovery is usually quicker.
One Recession, Two Realities
For valuation professionals, fund managers, and business owners, understanding the local context is everything.
A recession in South Africa or Nigeria cannot be viewed through the same lens as one in Germany or Canada.
The tools, risks, and investor behaviour differ – and so must your valuation approach.