Below I look at six devaluations. They are the devaluations that occurred in Argentina in 2002, Great Britain in 1992, Sweden in 1992, Brazil in 1999, Russia in 1998, and Indonesia in 1997. I do not go into the detail surrounding each devaluation. These are all well documented and extensively discussed in places like Wikipedia. My interest in looking at this is to see if there any commonalities in the timing and magnitude of the moves amongst the currency rate, the nominal local stock market, and the local stock market as denominated in U.S. dollars. In many cases, the U.S. dollar denominated stock market rose many hundreds of percent post the devaluation. This may offer a proxy for investing in Greece (or any other country) should it ultimately leave the euro and turn to an alternate currency.
The graph below depicts the Merval Index in Argentina in both nominal terms and in U.S. dollars on the right two axis'. The left axis shows the spot rate of Argentine peso to the U.S. dollar. Prior to January of 2002, the spot rate was pegged at 1 peso to the dollar. The Merval Index fell during this time considerably. It was not until just before the devaluation began in January of 2002 that the nominal index bounced. However, the U.S. dollar denominated index kept falling until after the devaluation and finally bottomed in June when the peso stopped depreciating against the U.S. dollar. At this point in time, it became very lucrative to invest in the Merval as the market began a dramatic rise off the bottom. The currency also began to recover at this time.
The 1992 devaluation of the pound (made famous by George Soros) had a similar profile to Argentina. The FTSE 100 market index fell meaningfully in the months leading up to the devaluation. This occurred even as the pound strengthened versus the U.S. dollar. Then in September 2002 when the devaluation occurred, the nominal FTSE 100 jumped up considerably almost in lock step with the currency depreciation. The U.S. dollar denominated FTSE 100 did not reach bottom until the pound eventually found a floor in February 1993. This is again similar to Argentina's experience. After reaching its floor, the U.S. denominated FTSE 100 began a significant rally.
The Brazilian devaluation also showed severe market declines (as measured by the Bovespa Index) leading up to the time of the devaluation in January of 1999. The Bovespa index, in nominal terms, bottomed two times, once in September of 1998 and again at the time of the devaluation in January 1999. The U.S. dollar denominated Index had similar performance but did not find a floor until slightly after the devaluation had commenced. Even waiting for the currency to ultimately reach is floor before investing in March 1999, one would have captured a nearly 100% rally in the U.S. dollar denominated bovespa.
The devaluation in Russia fits the script laid out above. The Micex Index in Russia fell meaningfully in the months leading up to the devaluation. At the point of the devaluation, there continued to be some pressure in both the nominal Index and the U.S. dollar denominated index. The micex ultimately found a floor 2 months after the devaluation commenced and went on to gain many hundreds of percent. One difference versus the above mentioned devaluations is that the U.S.dollar denominated market found its floor in October 1998, well before the currency ceased its rapid depreciation around April of 1999.
The difference with Indonesia is that the market (the Jakarta Index) started falling after the devaluation began in earnest in July of 1997. It then proceeded to decline all the way until after the currency found its floor in June of 1998. Both the nominal and the U.S. dollar denominated index did not reach bottom until September of 1998. They then began a significant rally.
The devaluation in Sweden in 1992 followed a very similar playbook. In the months leading up to the devaluation, the market fell meaningfully, even as the currency strengthened. Then the devaluation occurred and the market reversed course. In this case, the rally commenced well before the currency reached a floor. In fact, the rally was almost over by the time currency reached its floor in December 1993 and ceased depreciating.
Currency devaluations create massive volatility. In the months leading up to the devaluation, stock markets typically do very poorly. In fact, if there's any chance of a devaluation, it's probably wise to stay out of the market. However, once the devaluation commences, the stock market opportunity may be significant. Each case is different and I certainly have not discussed the details surrounding currency controls, political turmoil, etc. However, given the potential gains and the consistent opportunity that this kind of event presents, I think it's worthwhile for investors to do the work. Looking at the table below, the best time to consider investing appears to be 1 to 5 months after the devaluation commences.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.