【KROLL】Kroll英國和加拿大標(biāo)準(zhǔn)化無風(fēng)險利率指引

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March19,2025

KrollCostofCapitalRecommendationsandPotentialUpcomingChanges

–March2025Update

ExecutiveSummary

Krollregularlyreviewsfluctuationsinglobaleconomicandfinancialmarketconditionsthatmaywarrantchangestoourequityriskpremium(ERP)andaccompanyingrisk-freeraterecommendations.Therisk-freerateandERParekeyinputsusedtocalculatethecostofequitycapitalinthecontextoftheCapitalAssetPricingModel(CAPM)andothermodelsusedtodevelopdiscountrates.Wealsoupdatecountryriskdataonaquarterlybasisfor175+countriesusingvariousmodels.

TheKrollRecommendedU.S.ERPisbeingreaffirmedat5.0%whendevelopingUSD-denominateddiscountratesasofFebruary28,2025,butitcouldbeincreasedinthenearfuture.TheKrollRecommendedEurozoneERPisbeingreaffirmedintherangeof5.5%to6.0%asofthesamedate,butwebelievethata5.5%ERP(i.e.,towardsthelowerendoftherange)ismoreappropriatewhendevelopingEUR-denominateddiscountratesasofFebruary5,2024,andthereafter,untilfurtherguidanceisissued.

Notwithstandingthecurrentrecommendations,wearemonitoringeconomicandgeopoliticaleventsthatmaychangeourviewsandimpactourguidanceduringthefirsthalfof2025.Therearethreemajorpotentialsourcesofuncertainty.

First,thenewU.S.administrationthreatenedtoimposetariffsashighas200%onsomeU.S.tradingpartners.Almostdaily,newannouncementsaremadeofpossiblenewtariffs,followedbyareprieveordelayineffectivedatesforsomeofthem.Theuncertaintycreatedbythescope,magnitudeandtimingofthesetariffs,alongwiththepossibleensuingretaliationbyU.S.tradingpartnersmaydisruptglobaltradeandpotentiallyleadtohigherinflationand/oraneconomicslowdownintheU.S.andothercountries.BusinessesarestartingtodelayM&Aandcapitalexpenditure/expansionplans,astheywaitforthetariffsituationtobecomelessambiguous.U.S.financialmarketsarealreadyreelingfromthisuncertainty,creatingsignificantvolatilityforbondsandequities.

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Second,thereisheighteneduncertaintyaboutbudgetpolicies,potentialtaxcuts,increasedgovernmentspendingandarelatedriseinbudgetdeficits,notjustintheU.S.butelsewhere(e.g.,Germany),whichcouldplaceupwardpressureonlong-terminterestratesanddisruptglobalfinancialmarkets.Thenegativeimpactonmarketsfromhigherlong-terminterestratescouldbemitigatedifrealgrowthacceleratesmateriallyduetotheadditionalfiscalspendingmeasures.

Finally,thereareotherglobalgeopoliticaleventswarrantingclosewatchincluding,butnotlimitedto,areignitionoftheongoingconflictsintheMiddleEast,anunsatisfactoryresolutionoftheRussia-Ukrainewar,andapotentialwithdrawaloftheU.S.fromNATO.

Thecombinationoftheseriskshasthepotentialtocausesignificantupheavalinglobalfinancialmarketsandmayleadtoa“risk-off”investorsentiment,withacorrespondingincreaseinERPforcertaingeographies(i.e.,investorsmaydemandahigherpremiumovertherisk-freeratetoinducethemtoinvestinthoseequitymarkets).

CostofCapitalRecommendations

UnitedStates

TheKrollRecommendedU.S.ERPremainsat5.0%asofFebruary28,2025.ThisismatchedwiththehigherofaU.S.normalizedrisk-freerateof3.5%orthespot20-yearU.S.Treasuryyieldprevailingasofthevaluationdate.TheKrollU.S.RecommendedERPwaslastchangedonJune5,2024,whenitwasloweredfrom5.5%to5.0%.

Atthisjuncture,theU.S.economycontinuestoberesilient,butthereareconsiderablerisksloomingin2025thatwarrantclosemonitoringandmayleadtoanincreaseinourU.S.ERPrecommendation.Thesoft-landingscenario(i.e.,lowerinflation,lowerrealgrowth,butnorecession)thathadbeenpricedinbyinvestorsuntilearly2025isnowbeingchallenged.Ascenarioofstagflationorevenrecessionhasbeenresurrectedbyseveraleconomists.Adeepereconomicslowdownandaresurgenceininflation(keepinginterestrateshigherforlonger)couldbeinthecardsfor2025,particularlyifthetradewarcontinuestoescalateandpersiststhroughtherestoftheyear.

Ontheotherhand,thereisstillachancethatsomeoftheseriskswilldissipateduring2025.ThedecisiontoreaffirmtheU.S.ERPRecommendationattheendofFebruaryisbasedprimarilyonthefollowingtrendsineconomicandfinancialmarketindicators:

.TheU.S.economyhasproventobemoreresilientthananticipated.Despitecallsforarecessionbymosteconomistsduetoasurgeininterestratesstartingin2022,theU.S.outperformedallotherdevelopedeconomiesinboth2023and2024.U.S.realGDPgrewby2.8%in2024,inlinewiththeperformanceof2.9%seenin2023andbetterthanthe2.5%in2022.TheaggressiveratehikingcycleoftheFederalReserveBank(Fed)toquellinflationdidnotslowgrowthintheU.S.economy,butdidhelpdriveinflationdownfromitsmultidecadehighof9.1%inJune2022to2.9%inDecember2024.

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.U.S.equitymarketshadtworemarkableconsecutiveyears(2023and2024)ofstellar

performancewhereallmajorindicesreachednewrecordhighs.U.S.marketswereliftedbytheprospectsofproductivitygainsandearningsgrowthfromgenerativeartificialintelligence(Gen-AI)and,morerecently,bytheFed’sratecuttingcyclethatstartedwithalarger-than-anticipatedratecutof50basispoints(b.p.)inSeptember2024.MarketscontinuedtheiroptimismaftertheelectionofDonaldJ.TrumpforasecondtermastheU.S.presidentinearlyNovember2024.

Promisesofderegulationandpro-growthpolicieshelpedU.S.majorindicesachievenewrecordhighs,withtheS&P500indexreachingitshighestlevelonFebruary19,2025.OnFebruary28,2025,theS&P500closedapproximately3%belowitsall-timerecord.

.TheVIXindex(thevolatilityindexontheS&P500),alsoreferredtoasthe“fearindex”,waslowerin2024thanitslong-term-average,withafewexceptionalspikesobservedduringtheyear.The

VIXaveraged15.6,thelowestdailyaveragesince2019,andwellbelowthelong-termhistoricalaverageofapproximately20.1TheVIXdidoscillateconsiderablyduring2024,reachingalow(atcloseofday)of11.9onMay21(thelowestlevelsinceNovember27,2019),andahighof38.6atclosingonAugust5(thehighestlevelsinceOctober28,2020,duringCOVID-19pandemic),butthelatterreadingwasdeemedtobeaone-offevent.2AftertheS&P500indexreacheditsFebruary2025record,theVIXindexhasrisentolevelssimilartoitslong-termaverage,closingat19.6onFebruary28,2025.

.Untilrecently,U.S.corporatecreditspreadscontinuedatighteningtrendthatstartedinmid-2022.

Forcontext,thespreadbetweenU.S.high-yieldandinvestment-gradecorporatebondyieldsstoodat2.0%asofDecember31,2024,whichislowerthanwhenwelastchangedourU.S.ERPrecommendation.3Thisspreadisalsosignificantlylowerthanitslong-termaverage(1996-2024)of3.7%andapost-globalfinancialcrisis(2008-2024)averageof3.6%.TheinterestratehikingcyclethattheFedstartedin2022toquellinflationarypressureswasintendedtotightenfinancialconditions.Indeed,interestratesrosesignificantlyfromtheirCOVID-19lows,makingitharderforhouseholdstogetnewmortgagesandplacingpressureonriskierbusinessestorefinanceormeettheirdebtobligations.Ingeneral,highyieldspreadsareseenasareasonableindicatorfortheoverallhealthofaneconomy,sincespeculative-ratedcompaniestendtobeatahigherriskofdefaultinginrecessionaryperiods.Despitethehigherinterestratesobservedsince2022,creditspreadshaveactuallynarrowedduringthisperiod,indicatingthatinvestorsdidnotbelievetheratehikeswereleadingtoincreasedsystem-widedistressrisksinfinancialmarkets.Partoftheexplanationforthehistorically-low-creditspreadsthroughtheendofFebruary2025appearedtoberelatedtoanexpectationofforthcominginterestratecutsandstill-strongrealeconomicgrowth.

1TheVIXindexaveraged19.9overthelast30years(1995?2024;dailybasis).

2TheAugust5,2024intradayspikewassomewhatanomalous–itwasoneofonlytwointradayhighsduring2024thatwere

greaterthan30.SomeanalystsexplainthisspikebyanincreaseinthebidandaskspreadofS&P500optionsusedinthe

calculationoftheindex.See,forexample,Todorov,Karamfil,andGrigoryVilkov.AnatomyoftheVIXspikeinAugust2024.No.95.BankforInternationalSettlements,2024.Acopyofthearticlecanbefoundhere:

/publ/bisbull95.pdf.

3Highyieldcorporatebondsarebelow-investmentgradeinstruments(i.e.,thosewithacreditratingbelowBBB-).Theyarealsoreferredtoasspeculative-gradeor“junk”bonds.

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.ImpliedERPindicationsfromforward-lookingmodelsbasedonProfessorAswathDamodaran’sresearchandourversionoftheDefaultSpreadmodelareatsimilarlevelsaswhenwelastchangedourU.S.ERPrecommendation.

.Contrarytotheexpectationsofmanyeconomists,thesteepincreaseininterestratesduring2022and2023didnotresultinasignificantincreaseintheunemploymentrate.Furthermore,theunemploymentratehasbeenlowandstablesincewelastchangedourrecommendedU.S.ERPinJune2024.ThroughJanuary2025theunemploymentrateintheU.S.hasvariedwithinatightrangeof4.0%and4.2%.4Forperspective,theselevelsarelowerthantheunemploymentrateobservedduringpastexpansionperiods.Since1990,theaverageunemploymentrateduringU.S.economicexpansionswas5.7%.5Inaddition,accordingtodatapublishedbythenon-partisanCongressionalBudgetOffice(CBO),thenaturalrateofunemploymentiscurrentlyaround4.3%.6ThissuggeststhattheU.S.economyisstillslightlyexpansionaryandthattheunemploymentrateisnearitslong-termstablelevel.RecentdatareleasesshowthattheU.S.isstillseeingrelativelystrongjobcreation,althoughtherearevarioussignsofacoolingmarket.

AlleconomicandfinancialmarketindicatorsthatwereviewonaregularbasisshowthatconditionshaveeitherimprovedorremainedatsimilarlevelssincetheKrollRecommendedU.S.ERPwasloweredfrom5.5%to5.0%inJune2024.

Recently,however,uncertaintyhasrisenmaterially,whichisleadingmarketparticipantstorethinktheirexpectationsfortheremainderof2025.WebelievethattherearemajorsourcesofdownsiderisksanduncertaintythatmayleadustoincreaseourU.S.ERPrecommendationinthenearfuture.

.First,PresidentDonaldTrumphasthreatenedtoimposetariffsashighas200%onU.S.tradingpartners.Theuncertaintycreatedbytariffscouldleadtopotentialdisruptionsinsupplychainmanagementandinviteretaliationfromtradepartners,whichcouldlowerGDPgrowthandincreasepricelevels,atleasttemporarily.InflationarypressureswouldmaketheFed’staskofdecidingonthepathofinterestratesevenmoredifficult.Headlineinflation,asmeasuredbytheConsumerPriceIndex(CPI),beganarapiddescentsinceitsmultidecadehighof9.1%inJune

2022.AstheFedembarkedonitsratehikingcycle,inflationdeceleratedsignificantlythroughmid-

2024andatafasterpacethanmanyanticipated.However,theprocessofdisinflationhasbeenabumpyone,andinflationhasyettoreachtheFed’s2.0%target.Recentreadingshaveshownanuptickinheadlineinflation,atrendthatbeganinOctober2024andcontinuedthroughJanuary

4TheU.S.unemploymentratewas4.1%inDecember2024,4.0%inJanuary2025,and4.1%inFebruary2025.

5ExpansionperiodsdefinedbytheNationalBureauofEconomicAnalysis(NBER).

6Thenaturalrateofisthehypotheticalunemploymentratethatisconsistentwithstableinflationandaggregateproductionbeingatitslong-runlevel.Inotherwords,itisthelowestunemploymentratethatcanbesustainedwithoutcausingwagesgrowthandinflationtorise.Themoretechnicalterm(ineconomics)forthisconceptisNon-AcceleratingInflationRateofUnemployment

(NAIRU).TheNAIRUcannotbedirectlyobservedandneedstobeestimated.TherearevariousmodelsthateconomistsusetoestimatetheNAIRU,anddefinitionsmayvaryamongthem.SinceJuly2021,theCBOrenameditsNAIRUestimateseriesfrom“NaturalRateofUnemployment(Long-Term)”to“NoncyclicalRateofUnemployment”.ForthelatestCBOestimatesvisit:

/series/NROU.

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2025.7Servicespriceshavebeenparticularlystickyandcontinuetobeadriverofinflation.AresurgenceininflationduetotariffsmaycompeltheFedtokeepshort-terminterestrateshigherfortheremainderof2025,whichcanaddfurtherpressuretotheU.Sconsumerswaningspendingpowerandsloweconomicactivityfurther.InMarch2025,consumerconfidence,asmeasuredbytheUniversityofMichiganssurveyofconsumers,droppedtoitslowestlevelsinceNovember2023.8SomeeconomistsarenowpredictingtheU.S.economywilltipintorecessionasaresultoftheuncertaintycreatedbytradepolicyuncertainty.ActionsundertakenbythenewDepartmentofGovernmentEfficiency(DOGE),includingmassivelayoffsofU.S.federalemployees,isalsocontributingtotheheighteninguncertainty.

.Second,theU.S.administrationindicateditsplantoextendtheTaxCutandJobActof2017(TCJA)thatwassignedintolawduringPresidentTrumpsfirstterm.MakingtheTCJApermanentwouldincreasetheU.S.budgetdeficitsignificantly.AccordingtothePennWhartonBudgetModel,fromtheUniversityofPennsylvania,thepermanentextensionoftheTJCAwithallitsprovisionswouldincreasetheU.S.budgetdeficitbyaround$4trillionoverthenext10years.9Morerecently,thePennWhartonBudgetModelpreparedvariousscenariosbasedonthebudgetreconciliationproposalforfiscalyear2025releasedbytheHouseofRepresentativesinFebruary.UndertheHousesproposedreconciliationlegislation,$4.5trillioninnettaxcutsoverthenextdecadeareallowed,providedtheU.S.Congressachievesagoalof$2trillioninspendingcuts.ThePennWhartonBudgetModelestimatedthatthecombinedspendingandtaxproposalsproposedbytheTrumpadministrationwouldincrease10-yearprimarydeficitsby$5.1trillionbeforeaccountingforeconomicgrowtheffects,andassumingthatmanyoftheprovisionswouldexpireaftercalendaryear2033.Takingintoconsiderationpositivegrowtheffects,theyestimatedthedeficitwouldincreaseby$4.9trillion.10

AccordingtotheU.S.GovernmentAccountabilityOffice(GAO),thefederalgovernmentisonanunsustainablefiscalpath.11AsofDecember31,2024,theGAOestimatedthatunderthecurrentrevenueandspendingpolicies,(i.e.,beforePresidentTrumpspolicieswereenacted)thedebtheldbythepublicwouldreachahistoricalhighof106%ofnominalGDPin2027,growingto200%ofGDPby2047.During2024,spendingondebtservicing(i.e.,payingtheinterestonthedebt)exceededspendingonMedicareandnationaldefense.

7CPIinflation(beforeseasonaladjustments)was2.4%forthe12-monthperiodendinginSeptember2024,thelowestlevelsinceFebruary2021,butroseprogressivelytoreach3.0%inJanuary2025,decliningto2.8%inFebruary.ThePersonalConsumptionExpenditures(PCE)priceindex,theFedspreferredmeasureofinflationrosefrom2.1%inSeptember2024to2.5%inJanuary

2025.

8BasedonpreliminarysurveyresultsforMarch2025forIndexofConsumerSentiment.Source:SurveyofConsumersUniversityofMichigan.Forthelatestsurveyresults,visit:

/.

9“The2024TrumpCampaignPolicyProposals:Budgetary,EconomicandDistributionalEffects”,August26,2024.Availablehere:

/issues/2024/8/26/trump-campaign-policy-proposals-2024.

10“TheFY2025HouseBudgetreconciliationandTrumpAdministrationTaxProposals:Budgetary,Economic,andDistributionalEffects”,February27,2025,updatedonMarch3,2025.Availablehere:

/issues/2025/2/27/fy2025-house-budget-reconciliation-and-trump-tax-proposals-effects.

11“TheNation'sFiscalHealth:StrategyNeededasDebtLevelsAccelerate”,February5,2025.Reportavailablehere:

/products/gao-25-

107714#:~:text=Despite%20strong%20economic%20growth%2C%20the,billion%20in%20fiscal%20year%202024.

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ThenewU.S.administrationpromisedsavingsinthefederalgovernmentbudgetbytrimmingsomeprograms,eliminatingwaste,andcuttingdownonthespendingagendainitiatedbythepreviousadministration.Planstoimplementpro-growthpolicies,includingderegulation,loweringcorporatetaxes,andincreasingdomesticenergyproductioncouldspureconomicgrowthandmitigatesomeoftheissuesrelatedtonationaldebt.Ontheotherhand,thenewU.S.administrationisplanningtoimplementrestrictiveimmigrationpoliciesthatwouldaffectlaborforcegrowth.TheTrumpadministrationoutlineditsimmigrationpolicytoincludetwomajorcomponents:restrictingimmigrationanddeportingundocumentedpeoplealreadylivingintheU.S.Thesepoliciescouldbedisruptiveforindustriesthatrelyonthislaborforceandcreateuncertaintyinsomesectorsandaddtoinflationarypressures.

.Third,thenewU.S.administrationhasannouncedseveralpolicychangesininternationalrelationsthatareleadingtoanincreaseingeopoliticalrisks.Ingeneral,theseshiftsreflectageneraltrendtowardsnationalismandde-globalizationobservedintheelectionresultsofmanyothercountriesin2024andearlier.PresidentTrumpisseekingtorecalibrateand/orwithdrawU.S.supportforvariousmulti-lateralagreements(e.g.,OECDglobalminimumtax)andinternationalorganizations.OfparticularconcernisthepossibilityofU.S.removingsupportfortheNorthAtlanticTreatyOrganization(NATO).ThesediscussionshavecausedanuproarinEuropeandareleadingEuropeangovernmentstorecognizetheneedtorearmandincreasedefensespending.Thisisparticularlypressing,giventhenewU.S.administration’sdisplayofclosertiestoRussiawhennegotiatinganendtotheRussia-Ukrainewar.ConflictsintheMiddleEast,includingtheIsrael-Hamas,mayalsoescalate.President’sTrumprhetoriconannexingGreenlandorinmakingCanadaa51ststateareexamplesofhowvolatiletheU.S.foreignpolicyisbecoming.

Ingeneral,thesepoliciesintroduceaconsiderableamountofdownsiderisktothecurrentoutlookandarealreadycreatingincreasedvolatilityinbothU.S.equityandbondmarkets.MajorU.S.stockmarketindiceshaveerasedalltheir2025gainsandarenearingacorrection.12

Long-terminterestrateswouldlikelymoveupiftheneteffectofthenewadministration’spoliciesleadtohigherbudgetdeficitsthatcouldresultinafurtherdowngradeoftheU.S.fiscalpositionanditscreditrating.Similarly,tradewarsandrestrictiveimmigrationpoliciescouldcreateinflationarypressures,raiseyieldsatthelongendofthecurve,andpushtheFedbacktoraisingratesattheshortendofthecurvetobringinflationbacktotarget.

Importantly,theneteffectofthesepoliciescouldbetosloweconomicactivityandhinderearningsgrowth.Thelongerthisenvironmentofheighteneduncertaintypersists,themorelikelyitistoleadtoaretrenchmentinconsumerspending,aswellasadelayorcancellationofcapitalspendingplansandM&Aactivitybybusinesses.

12Astockmarketindexcorrectionisgenerallydefinedasadeclinebymorethan10%(butlessthan20%)fromarecentrecordhigh.

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Eurozone(FromaGermanInvestorPerspective)

TheKrollRecommendedEurozoneERPremainsintherangeof5.5%to6.0%,tobeusedinconjunctionwiththehigherofaGermannormalizedrisk-freerateof2.5%orthespot15-yearGermangovernmentbondyieldasofthevaluationdate.Wecontinuetobelievethata5.5%ERP(i.e.,towardsthelowerendoftherange)ismoreappropriatewhendevelopingEUR-denominateddiscountratesasofFebruary5,2024,andthereafter,untilfurtherguidanceisissued.

IncrementalcountryriskadjustmentsforotherEurozonecountrieswithasovereigndebtratingbelowAAAmaybeappropriate.PleasenotethatthisinformationdoesnotsupersedeGermanysIDW(InstitutderWirtschaftsprüfer)guidanceforprojectsthatwillbereviewedbyGermanauditorsorregulators.

Aftertwoconsecutiveyearsofstrong(above-potential)growth,theEurozonesawitseconomynearlystagnatein2023(0.4%inrealterms),dueingoodparttotheaftereffectsoftheRussia-Ukrainewar.Therecoveryin2024wasshallowfortheregion(0.9%realGDPgrowth),withGermany(traditionallyseenasthegrowthengineoftheEurozone)contractinginboth2023and2024.13,RisingpopulismhasbeenacommondenominatorinelectionsacrosstheEurozone,makingeconomicpoliciesmoredifficulttoimplement.Forexample,parliamentaryelectionsinFranceinmid-2024leftPresidentEmmanuelMacronsabilitytogoverninaprecarioussituation.

TheEurozoneoutlookfor2025hasbecomemoreuncertainbythechangingpoliciesbythenewU.S.administration.First,PresidentTrumpannouncedtariffsonEUsteelandaluminumproducts.TheEuropeanCommissionrespondedwithcountermeasuresanditsownsetoftariffsonU.S.exports.14PresidentTrumpthreatenedtolevytariffsonfurtherEUproductsshouldtheEUpursueitsownsetoftariffs.Iftariffsareimplementedandescalationcontinues,wewouldlikelyseeanegativeimpactonrealGDPgrowthfortheEurozone.

Second,theU.S.administrationspossiblewithdrawalfromNATOandindicationsofdiminishingsupportforUkrainespositioninitsfightagainstRussiaisleadingtoamajorshiftinstrategicdirectionfortheEU.Europeancountrieshaverealizedtheneedtoboostsecurityindependenceandinvestintheregionsdefense.Asaresult,theEUlaunchedits“ReArmEurope”plan,withtheaimofunleashingtheuseofpublicfundingindefense.Amongothermeasures,theplanproposedrelaxingbudgetdeficitrulestoallowgovernmentstoincreaseborrowingtofunddefensespending.15Increaseddefensespendingcouldhelpoffsetsomeofthepotentialnegativeeffectfromtariffsonrealeconomicgrowth.

13“PreliminaryFlashEstimatefortheFourthQuarterof2024GDPstableintheeuroareaandupby0.1%intheEU”,Eurostat,

January30,2025.Availablehere:

https://ec.europa.eu/eurostat/web/products-euro-indicators/w/2-30012025-ap#fragment-

15944082-grio-inline-nav-2.

14TheEuropeanCommissionistheexecutivebodyoftheEuropeanUnion(EU).TheEurozoneisasubsetofEUmemberstatesthathaveadoptedtheeuroastheircurrency.

15“PressstatementbyPresidentvonderLeyenonthedefencepackage”,EuropeanCommission,March3,2025.Availablehere:

https://ec.europa.eu/commission/presscorner/detail/sv/statement_25_673.

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Similarly,Germanparliamentaryelectionsinearly2025arepavingthewaytoincreasedgovernmentspendingfueledbyadditionalborrowing.InMarch,Germanlawmakerspassedahistoricpackageofconstitutionalreformstoallowthefederalgovernmenttoincreaseborrowinglevels.ThelooseningofbudgetdeficitrulesisexpectedtounleashgovernmentspendinginGermany’saginginfrastructureandindefense,whichcouldboosteconomicgrowth–atleasttemporarily.Ontheotherhand,long-termGermangovernmentbondyieldshavebeenrisingsteadily,undertheprospectsofahigherdebtburden.

Eurozoneinflationhasdeceleratedsignificantlysinceitlastpeakedat10.6%inOctober2022.InSeptember2024,theannualchangeintheHarmonizedIndexofConsumerPrices(HICP),dippedto1.7%,belowtheEuropeanCentralBank(ECB)targetrateof2.0%,althoughithasre-acceleratedsincethen.TheECBratecuttingcyclestartedinJune2024andcontinuedatasteadypaceof25b.p.cutsthroughallitsremainingmeetingsin2024,withthedepositfacilityratereaching3.0%attheendofDecember2024.Despiteinflationtickingbackupto2.4%inDecember2024,theECBlowereditspolicyratesfurtheratitsJanuary2025meeting,indicatingthatmonetarypolicyremainedrestrictive.Inflationincreasedfurtherto2.5%inJanuary,butcamedownto2.3%inFebruary,supportingtheECB’sdecisiontolowerratesbyanother25b.p.inbothitsFebruaryandMarchmeetings.TheECBisexpectedtocontinueitsrate-cuttingcyclein2025,whichmayhelpwitheconomicrecoveryintheEurozone.

EuropeanequitymarketstrailedtheU.S.in2024.However,thepan-EuropeanSTOXXEurope600indexbegan2025onamuchstrongernote.InearlyMarch,itreachednewrecordhighs,whichwasalsotrueforGermany’sDAXindex.Defensestockshaveperformedparticularlywell.EquityvolatilityinEuropehasbeenrelativelylowasmeasuredbytheVSTOXXindex.InearlyMarch2025,theVSTOXXhasrisensomewhat,approachingitshistoricalaverageofaround23.Nonetheless,shouldtheuncertaintyaroundtradewarsandgeopoliticalriskspersist,wecouldseespikesinvolatilityintheremainderof2025.

UnitedKingdom

TheKrollCostofCapitalNavigatorcontainshistoricalERPdatacomparedtolong-termgovernmentbondsforvariouscountries,includingtheU.K.HistoricalERPdatafortheU.K.beginsin1900andisavailableforeveryyearuntilthepresent.16However,KrolldoesnotcurrentlypublishanofficialERPrecommendationfortheU.K.whichtakesintoconsiderationbothhistoricalandforward-lookingindications.

Ingeneral,thecountry’shighexposuretoEurope,especiallysincetheonsetoftheRussia-Ukrainewar,indicatesthatU.K.equitymarketrisksaremorealignedwithEuropethantheyarewiththeU.S.Nonetheless,therearecertainrisksuniquetotheU.K.thatshouldbemonitoredin2025.

TheU.K.economysawasignificantnegativeimpactfromtheRussia-Ukrainewar,particularlyduetorisingenergypricesandsupplychaindisruptions.Tofightthesurginginflation,theBankofEnglandraiseditspolicyinterestrateatarapidpacein2022and2023,bringingittothehighestlevelsince2008.Asaresult,theU.K.economyalmostcametoahaltin2023,experiencingatechnicalrecessioninthesecondhalfof

16ForadditionaldetailsonthedatasetsincludedintheInternationalCostofCapitalmodulewithintheKrollCostofCapitalNavigator,visit:

/en/cost-of-capital/internati