The Curious Case Of The Venezuelan Stock Market And Its 225% Surge This Year 1

Venezuela’s stock market performance

The Caracas Stock Exchange or Bolsa de Valores de Caracas (BVCC)  is the only stock exchange in Venezuela (EMB). Venezuelan stock markets have skyrocketed in 2017 so far, rising about 225%. In 2016, the Venezuela’s benchmark index posted gains of about 117%.

Why is this outperformance deceiving?

The state of the Venezuelan economy and the collapse of the bolivar surely does not warrant such returns. Furthermore, alarming levels of inflation, depleting foreign exchange reserves and a rising fiscal deficit coupled with the risk of default and bankruptcy certainly does not call for such a rally. However, the inflation-adjusted returns on the stock market might give a different picture amid surging inflation.

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Venezuelan stocks are denominated in local currency. On paper, the Bolivar’s exchange rate in US dollar terms is 0.10 but in the black market, this rate is 600 times higher due to the country’s hyperinflation. Thus, investors in Venezuelan stock markets will be worse off when they convert their returns to dollars.

What is really driving Venezuelan stock markets?

Experts believe one of the primary reasons for the steep gains in Venezuelan stock markets is the risk of devaluation of the Venezuelan bolivar and the fact that investors have no other attractive investment option in an economy reeling under a crisis.

Charlie Bilello of Pension Partners believes “Frantic investors are using the stock market as a vehicle to hedge against rapid currency devaluation. Better to hold stocks than bolivars, is the prevailing thinking.”

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