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While GDP of 8.2 percent will grab headlines, it’s a rearview number. What’s more important in our view is that the rupee has made a clear break out to an all-time low versus the dollar and is one of the worse performing currencies this year.
The follow-up questions are 1) How have equities performed during periods of a depreciating rupee, and 2) what sectors outperformed and underperformed during these periods?
We looked at the three episodes in 2012, 2013, and 2014 where the rupee was depreciating. The Nifty50 and largecaps managed reasonably well, exiting each episode with a less than 10 percent loss or small gains.
Midcaps had significant and painful sell-offs in 2011 and 2013, but attractive gains in 2014. While definitive statements can’t be made because each cycle is different, clearly this suggests caution with respect to mid and small-cap exposure until
currency depreciation stabilizes.
Sectoral Preferences clearly favour IT, FMCG, Pharma and Reliance Industries (Energy):
IT and Pharma clearly benefit from a depreciating rupee. FMCG benefits due to the inelasticity of demand for fast moving goods, and the ability of most FMCG companies to pass on price rises.
Year-to-date (YTD), these are in fact the sectors that are outperforming, along with energy. With respect to energy’s surprising outperformance, one needs look no further than Reliance’s 60 percent weight in the index.
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