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For EFG International AG’s (SWX:EFGN) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Not all stocks are expose to the same level of market risk, and the market as a whole represents a beta of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
See our latest analysis for EFG International
What is EFGN’s market risk?
EFG International’s beta of 0.93 indicates that the stock value will be less variable compared to the whole stock market. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. EFGN’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
Could EFGN’s size and industry cause it to be more volatile?
A market capitalisation of CHF2.33B puts EFGN in the basket of established companies, which is not a guarantee of low relative risk, though they do tend to experience a lower level of relative risk compared to smaller entities. Conversely, the company operates in the capital markets industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect a low beta for the large-cap nature of EFGN but a higher beta for the capital markets industry. This is an interesting conclusion, since its industry suggests EFGN should be more volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is EFGN’s cost structure indicative of a high beta?
During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I test EFGN’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets is virtually non-existent in EFGN’s operations, it has low dependency on fixed costs to generate revenue. Thus, we can expect EFGN to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. This is consistent with is current beta value which also indicates low volatility.