Equity Risk Premiums Unchanged
Markets have been volatile over the last few months as conflict in the Middle East has led to substantial increases in oil prices and higher inflation expectations, at least in the near-term. With government bond yields at their highest levels since 2011 and market conditions continuing to evolve, we have provided an early warning on our assessment of the equity market risk premium (EMRP) as at 31 May 2026 for Australia.
After falling sharply with the onset of conflict in the middle east and rising oil prices, the ASX200 ended the month of May 2026 approximately level with 31 December 2025. With a slight improvement in earnings expectations over that period largely offset by rising government bond yields, this implies a relatively unchanged EMRP for Australia. As a result, we are set to keep our assessment of the EMRP unchanged at 4.75% as at 31 May 2026.
The impact of changes on overall market discount rates is presented below.
Source: Leadenhall
“Inflation in Australia was already too high before the recent conflict in the Middle East began. The most recent data have confirmed that some of the increase in inflation was being generated by economy-wide capacity pressures including ongoing tightness in the labour market. Developments in the Middle East remain highly uncertain but under a wide range of possible scenarios the conflict adds to global and domestic inflation.”
Driven by a slight increase in government bond yields since December 2025, overall market discount rates are marginally higher compared to December 2025. Equity market premiums remain at historical lows, which is consistent with observation made by the RBA in their May 2026 Statement on Monetary Policy.
Companies should therefore consider whether it is appropriate to adjust their discount rates accordingly compared to their prior period valuations, whether on their investment decisions or for impairment testing.
For further information on selecting an appropriate discount rate for your company please feel free to call us.
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