Equity markets likely to shine as Rupee's depreciation slows

In the past one decade, excluding 2008, equity markets in Asia, where currencies depreciated strongly, performed well subsequent to such depreciations. In general, markets slide when the home currency depreciates.

However, markets coming out of a currency bottom outperform the broader regional index over the following 3 to 6 months. For instance, after falling 20% in the four months from May to September 2013, the Indian rupee gained about 10% in the following six months. Sensex followed the rupee in tandem, falling some 6% as the rupee fell, and rising 15% as the rupee rose.

Over the last many years, Sensex and the rupee (against the US dollar) have risen or fallen noticeably closely. Now, as the rupee depreciation slows, equity performance is likely to improve, analysts predict.

“We believe that the USD rally is nearing its end. As the currency depreciation slows, equities can perform well,” says Devendra Joshi, strategist, Asia Pacifi c, HSBC. “Defensive sectors, like consumer staples, tend to outperform going into currency weakness. Consumer discretionary, banks and materials tend to lead coming out of it.”