The fluttering of a butterfly: The effect of currency volatility & equity valuations

I often talk how Indian markets even if they scale the 2008 highs are far cheaper than they were in 2009 or 2010. Here the idea is rooted in the simple idea that, a 100 bucks earned 6 years back is has a higher value than 100 bucks earned today. So NIFTY at 6300+ is cheaper today  (in relative terms atleast, if not in absolute terms) than  6300+ in 2008.

However,  there is an idea of “shifting grounds” here. Let us assume that 6300 of 2008 is achieved! This implies 9450, adjusted for 7% inflation over 6 years. But even in that, circumstances the 9450 Rupees  of today is not equivalent to the 6300 Rupees of 2008. This is because in 2014 1 Rupee is 25% cheaper than 1 Rupee of 2008, since rupee has fallen recently very steeply. Thus the real amount NIFTY has to rise, to adjust this fall is ~12600.

This makes our Indian markets cheap by atleast 53%. This is a silent fall! Had market fallen by 50% from the highs, we would have screamed “Bear!” but no one is looking things this way. Asset prices are still quoted in rupees which makes them cheaper not costlier. However good robust businesses are inflation proof. Or to be less categorical, good robust businesses are less affected by inflation. Thus their core business operations are working and growing well. And hence they are relatively cheaper!

A similar but opposite effect can be seen in the case of Nestle’ Inc and Swiss Franc. It can’t be said better than the residing guru of the value investing world


One thought on “The fluttering of a butterfly: The effect of currency volatility & equity valuations

  1. Pingback: Blast from the past- a prediction and a mistake | Meditations

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