Looking Beyond Index Charts
At first glance, the Indian stock market, represented by the Nifty index, appears to be significantly outperforming the Chinese market, represented by the Shanghai Composite. A simple ratio chart (see image below) comparing the Nifty to the Shanghai Composite shows a sharp rise, from 2.7 to 7.2 since around 2005. This suggests that the Nifty has surged far ahead.
The Hidden Flaw in This Comparison
However, this comparison misses a crucial element: currency denomination. The Nifty is priced in Indian Rupees (INR), while the Shanghai Composite is priced in Chinese Yuan (CNY). Without adjusting for the exchange rate, directly comparing these two indices can create a misleading impression.
When Currency Is Taken Into Account
Once we factor in the movements of both currencies against the US Dollar, the picture changes significantly. US Dollar-adjusted returns indicate that the Nifty is only about 20% higher than the Shanghai Composite since 2005—not three times higher, as suggested by the original chart.
Why the Difference?
A major reason for this difference is currency depreciation. The Indian Rupee has weakened substantially against the US Dollar over the years. In contrast, the Chinese Yuan has remained relatively stable, primarily due to China’s export surplus and trade strategies. China often tries to keep its currency weaker to support its manufacturing sector, while India experiences natural depreciation but aims to manage it.
Currency Can Distort the Narrative
The key lesson is that currencies can skew narratives about market performance. When comparing global indices, adjusting for currency is essential to obtain an accurate picture. What appears to be outperformance may simply be a reflection of currency trends.
What do you think about this insight? Have you considered the impact of currency in your global investments? Share your views in the comments! If you found this blog useful, please SHARE it with fellow investors!
