The Effect of Exogenous Variables on P/E Determinants in the Context of Expected Post COVID-19 Crisis Recovery - The Case of Balkan Capital Markets

Abstract

The paper aims to evaluate the effect of exogenous variables and phenomena on the relation between P/E ratio and its determinants by researching stock market data from the period of recovery after the last big economic crisis from 2008-2010. This is done in an attempt to generate useful insights and lessons about post-crisis market behaviour which will be much needed by investors in the context of the current COVID-19 crisis and expected medium-term recovery. The theoretical methodology of the research is to establish why and how many applications of P/E ratio have increased the importance of studying its determinants. That problem needs the paper to be focused on examining the effect of exogenous factors (macroeconomic variables) on the connection between P/E and its determinants. Our results show that there are significant implications if the effect of these variables is removed. As major findings, even more, there is evidence that exogenous factors are artificially increasing the connection between P/E and the determinants confirmed by in debt analysis with data of emerging Balkan capital markets: Slovenia, Romania, Bulgaria and Croatia, with the addition of Slovakia. The results of the developed methodology and subsequent empirical analysis allow confirming that in the current state of the Balkan capital markets the growing influence of exogenous (macroeconomic) factors change the dependence between the fundamental variables. After clearing the effect of exogenous variables on the determinants (ROE and Net margin), their influence on P/E actually weakens. The reason for this can be determined the high correlation of exogenous factors with the two determinants and with the P/E coefficient. The comparison between the two main tested indicators clearly shows that for the five stock exchanges ROE is qualified as highly correlated and susceptible to the influence of exogenous factors. The Net margin has a higher level of independence. The main recommendation for investors operating on the studied markets as well as globally is not to neglect the influence of exogenous factors on the applied financial models for measuring, modelling and forecasting of the market capitalization of companies trade on the stock exchange.

Keywords: P/E ratio, COVID-19, post-crisis recovery, fundamental analysis, relative valuation, macroeconomic factors

JEL Classification: P00, I20, I10, F00