The currencies of several emerging countries depreciate at a rapid pace. Does it imply that you should not invest in their stock markets? For example, the Polish zloty went from 15,767 to 21,444 zlotys per U.S. dollar in 1993. The Polish stock market went from 1,040 to 12,439 during the same period. Guess why the zloty depreciated.

Question

Quizplus · Accepted Answer

The Answer is No. A rapid depreciation of a currency is generally caused by a rampant inflation. Stocks are claims on real assets and their prices tend to go up with inflation. The question is whether they go up faster or slower than the inflation rate?
During 1993, the Polish inflation rate was around 40%, explaining the zloty's depreciation. The Polish stock market appreciation was extremely high. The privatization program drew enormous interest in 1992 and 1993. The rise in stock prices was either based on expectations of very high future economic growth or was somewhat irrational. The 1994 performance of the stock market was very bad.

The Currencies of Several Emerging Countries Depreciate at a Rapid