The effect of currency depreciation on stock market

Updated 7/27/2023 12:22:00 PM
The effect of currency depreciation on stock market

Currency devaluation is a term used to describe the decrease in the value of a currency in relation to other currencies. The impact of currency devaluation on the stock market can be significant, as it affects the value of shares, the purchasing power of investors, and the competitiveness of businesses. In this article, we explore the impact of currency devaluation on the stock market and its reflection on the Egyptian economy.

When a currency is devalued, the cost of imports increases, while the cost of exports decreases. This can have a significant impact on businesses, particularly those that rely heavily on imports or exports. For example, if a company imports raw materials from other countries, the cost of those materials will increase if the currency is devalued. This can lead to higher production costs, lower profit margins, and ultimately a decrease in the value of the company's shares.

Conversely, a devalued currency can benefit companies that export goods. When a country's currency is devalued, its exports become cheaper, making them more attractive to foreign buyers. This can increase demand for the company's products, leading to higher sales and profits, which can increase the value of the company's shares.

Another impact of currency devaluation on the stock market is its effect on investor sentiment. When a currency is devalued, investors may become more cautious and hesitant to invest in the stock market. This is because a devalued currency can lead to higher inflation, which can erode the value of their investments over time. As a result, investors may prefer to hold onto their cash or invest in other assets, such as real estate or gold, which are seen as more stable and less volatile.

Now let's take a look at the Egyptian economy as an example. Egypt has experienced significant currency devaluation in recent years. Starting 2016, the Egyptian government devalued the Egyptian pound in an effort to boost exports and attract foreign investment. However, this devaluation had a significant impact on the country's stock market. Following the devaluation, the Egyptian Exchange (EGX) experienced a sharp decline, with the benchmark EGX 30 index falling by more than 12%. This was partly due to investor concerns about inflation and the impact of the devaluation on the economy as a whole. However, some sectors of the market, such as exporters and tourism-related companies, saw an increase in demand for their shares as their products became more competitive in international markets.

Despite the initial decline, the EGX has since recovered, with the EGX 30 index reaching record highs in 2021. This recovery can be attributed to a number of factors, including increased foreign investment, improved economic growth, and government reforms aimed at improving the business environment. Furthermore, during the late 2022 Egyptian Pound devaluation, the EGX 30 index recorded the best-performing benchmark, which came one day before the announcement of a financing deal with the International Monetary Fund (IMF), according to US financial service Bloomberg calculations.

In conclusion, currency devaluation can have a significant impact on the stock market, both positive and negative. While a devalued currency can benefit exporters and certain sectors of the economy, it can also lead to higher production costs and inflation, which can negatively affect the value of shares. As for Egypt, while the initial devaluation had a negative impact on the stock market, the economy has since recovered, demonstrating the resilience and adaptability of the Egyptian business community.

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Bahaa Farouk

Bahaa holds a bachelor’s degree in computer science. He also holds two master’s degrees in artificial intelligence and business administration. He has more than 18 years of experience in information technology, telecom, banking and fintech, cloud and digital transformation across Egypt, the Gulf region, and Europe. Bahaa is honored to work in several organizations: Huawei, HP, Ooredoo, and Vodafone, and currently Bahaa is in charge of software engineering practices of Banque Misr digital transformation where adopting best-in-class fintech solutions, utilizing modern architecture, applying agile ways of working, and assuring smart security controls in place.