To demonstrate this approach, we define several hypothetical scenarios in the MSCI Valuation Scenario Model and compare them against the result of a hypothetical base case. The MSCI Valuation Scenario Model is a DCF-based tool. It derives cash flows based on growth expectations over short, medium and long horizons, which follow an auto-regressive process with mean-reverting features and discounts forecast cash flows with the expected risk-free rate and risk premium. By comparing valuations from scenarios with varying projections for growth and discount rates, the model analyzes the impact of growth shocks and discount-rate shocks on valuations.
SINGAPORE (May 8): The Covid-19 pandemic has already had a notable impact on public equity markets, with the MSCI ACWI Index declining by just over 20% for the first quarter of 2020. By contrast, the impact on private markets such as real estate has been harder to establish. As a private asset class with lease structures and investment-hold periods that typically extend over multiple years, as well as a reliance on relatively infrequent appraisals, it has historically taken longer for adjustments to play out. However, real estate has not historically been immune to growth shocks. Discounted-cash-flow (DCF) scenarios may help investors better understand the potential sensitivity of their portfolios to those shocks.
Defining and comparing discounted-cash-flow scenarios
