If I own a company whose assets are 100 barrels of oil valued at $10,000 in some currency, and the currency's value suddenly drops by a factor of two, I would expect that my company is now suddenly "worth" $20,000 in this newly devalued currency (or in other words, still close to the same price as denominated in any alternate currency).

I've seen this happen in certain situations, where, when a currency's exchange rate fluctuates, the market as denominated in that currency moves in a closely (inversely) correlated way. Zimbabwe was also a good example, as hyperinflation kicked in, the stock market rallied (as denominated in Zimbabwe dollars).

I can understand that with a rapid devaluation, investor confidence could be spooked, and that the upswing might not be as extreme as it was in Zimbabwe. Regardless, there should at least still to some extent be a sharp change in "price" consistent with devaluation.

I've read that on December 18, 1994, Mexico devalued its peso by 18%, and by March it lost half of its value. When I look at a chart of the IPC Mexican stock market index (which seems to be denominated in pesos?) I don't see anything like an 18% jump in share prices on December 18th, and do see a steady decline in the index as the peso fell. The chart looks more like what I might expect to see if it were denominated in dollars.

How does this happen? Is the chart denominating the index in the same pesos consistently? Do I have my dates and devaluation amounts off?

Do none of these companies have any assets that are priced internationally, and thus depend entirely on local peso revenues for their profits and valuation? I find that hard to believe.

Am I completely miss-understanding something? Was there something more to the devaluation mechanism that could allow the market to sustain this valuation?

  • 1
    Since I deleted my answer and voted to close the question (should have done it to begin with instead of trying to help you), I'll write it here: the assumption that the stock price is directly linked to the underlying assets value is incorrect. Also, the assumption that the stock price can change without a transaction is also incorrect. Thus, you expect the devaluation to change the numbers on the screen, but that's not what happens. Transactions change numbers on the screen, and if people don't buy - prices don't go up. Regardless of how many barrels the company has. – littleadv Mar 31 '13 at 2:20
  • There's certainly volume in any major exchange... claiming there are no transactions is silly. Why would a stock price have nothing to do with the value of the underlying assets? There are plenty of examples in history of a currency devaluation meaning a huge jump in stock prices. I'm trying to understand if there's something different about Mexico, or if I'm miss-reading the chart. – Brian Mar 31 '13 at 15:03
  • If there are no transactions - there's no price change. The fact that the price changed shows that there were transactions. The fact that the price changed differently from your simplistic expectations shows that its not all that simple. – littleadv Mar 31 '13 at 20:46
  • 1
    I didn't say it were simple, I posted a question in an attempt to better understand a complicated situation. In most cases stock prices in a devalued currency would go up immediately. Look at 1933 when the US devalued the dollar, it was the biggest rise in the dow in US history. Look at Zimbabwe. I'm trying to better understand a piece of history. Statements like "you don't understand investor sentiment" or "it's complicated" or "prices don't change without volume" ... these are not useful or constructive responses. – Brian Mar 31 '13 at 21:36
  • you got an answer, as speculative as any. You argued against it, so I deleted it. You won't get anything better than that here. I suggest you ask the people that traded at that time for their motives and reasoning, otherwise anything you'll get would be a guess. That is why I suggesting your question to be closed. – littleadv Mar 31 '13 at 23:29

Yes, this phenomenon is well documented. A collapse of an economy's exchange rate is coincidented with a collapse in its equities market.

enter image description here

enter image description here

enter image description here

The recent calamities in Turkey, etc during 2014 had similar results.

Inflation is highly correlated to valuations, and a collapse of an exchange rate is highly inflationary, so a collapse of an exchange rate is highly correlated to a collapse in valuations.

| improve this answer | |

Not the answer you're looking for? Browse other questions tagged or ask your own question.