In his last update from the middle of the year, published on July 31, Damodaran wrote that the American Treasury-down grade by Moody’s in May 2025-after earlier downgrades by S&P in 2011 and Fitch in 2023- “Throwed a key in the trial” Calculating the Implicative Equity-Risium Used as a starting point for estimating the global ownership risk.
To this downgrade, Damodaran said that he deducted the 10-year-old US Treasury yield directly from the expected return on the S&P 500 to distract the implicit ERP. But the AA1 rating now means that treasury inserts include a standard distribution. “To remove that risk,” he said, “I receive the standard distribution associated with an AA1 rating from the Treasury rate to arrive at a risk -free rate in dollars and a share risk premium based on that.”
The expected return on the S&P 500 was 8.45%on 30 June. After adjusting the 10-year treasury of 4.24%for a standard spread of 0.27%, Damodaran kept the American risk-free rate at 3.97%, resulting in a US ERP of 4.48%.
India: Risk premium rises to 7.46%
In the context of India, Damodaran estimated a share risk premium of 7.46% for an investment of average risk in Indian rupees on July 1, 2025.
To achieve this, he adjusted the Indian 10-year return of the government bonds of 6.32%by deducting the standard spread of the country of 2.16%, with a risk-free rate-free rate of 4.16%. Adding the India-specific ERP to this gave a total expected return of 11.62% on Indian shares.
“Also note that if you run the Indian government bond if the risk freedom percentage in rupees, you would effectively be double the Indian country risk, once in government bond and again in the risk premium for shares,” warned Damodaran.
He added that for high inflation currencies such as Indian rupees, analysts must ensure that disconneting feet and cash flow projections are aligned in inflation, or convert the complete valuation into American dollars using differential inflation estimates.
Ripple effects on the worldwide risk premiums of the country
Damodaran said that he further adjusted the US ERP to deduce a “ripe market” premium of 4.21%, so that the standard spread was emitted to reflect the risk premium for AAA-rated countries such as Canada, Australia and most of Northern Europe. For all other countries, he calculated additional risk premiums based on sovereign standard spreads, scaled up to display the greater volatility of shares and added to the basic premium.
This adjustment has increased the risk premium for the shares for countries previously established against a risk -free American treasury interest rate. “The effects of the American assessments Downgrade also manifest themselves in the table, with the US now have a higher risk premium than its AAA opposites,” Damodaran noted.
Fragile sovereign rating landscape
Damodaran also emphasized the wider decline of the sovereign credit quality. In 2025, only 11 countries retained AAA reviews, by 15 years ago, with the UK and France under the reduced. “The number of countries with sovereign assessments that are available has risen … but the number of AAA -assessed countries has fallen,” he wrote.
He warned that sovereign assessments, while long -standing indicators of standard risks, often delay in reality and under -represented political and social risks in various highly desired countries. For example: “The Midden -Oost … has a high sovereign reviews”, despite a considerable geopolitical instability, he wrote.
To alleviate these limitations, Damodaran said that he has sovereine credit default swap (CDS) spreads, which are a reflection of the real -time investor sentiment, in his context for assessing the country risk. “These market -bound figures will reflect events on the ground almost immediately, albeit with more volatility than reviews,” he said.
Corruption, violence and legal vulnerability complex risk
In addition to credit risk, Damodaran underlined how non-financial factors, including corruption, exposure to violence and legal unpredictability, are the risk of the country and feed on risk premiums. With the help of data from Transparency International, the Institute for Economics & Peace and the ownership alliance, he presented heat cards that closely reflected his share risk premium.
“The parts of the world that are most exposed to corruption and violence, and have fickle rule systems, tend to have higher risk premiums,” noted Damodaran, which enhances the relationship between qualitative risk factors and valuation discounts.
Country of operation, non -integration, determines exposure
It is important that Damodaran emphasized that investors and analysts should concentrate on where a company is active, not where it is included. “Exposure to the risk of the country comes from where a company is active, not where it has been included,” he said. For multinationals, Damodaran advised to use income or production weights to combine risk premiums in different countries.
In decisions on corporate financing, he said: “The location of the project will determine which risk premiums of the country play in the game.” For example, if Amazon invests in Brazil, this is the Brazilian ERP, not the US ERP, which is important for calculations of the costs of permission.
Guidance for valuation practitioners
Damodaran concluded the message with a detailed user manual about applying its ERP estimates in practice, from selecting the correct currency and estimating risk-free rates to coordinating the expected cash flows with the chosen inflation environment. For high inflation markets such as Turkey, he emphasized the importance of converting dollar drivers using inflation differences to achieve realistic returns for local currencies.
“There is nothing in this process that is original or path break,” he said, “but it does yield a systematic and consistent process for estimating disconement feet, the D in DCF.”
Yet he warned against abuse: “I am worried that people use these premiums in their ratings, without understanding the choices and assumptions that I had to make to come to them.”
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(Disclaimer: recommendations, suggestions, views and opinions of the experts are their own. These do not represent the views of economic times)
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