What’s the relationship between stock returns and exchange rates and stock market?

One important factor that investors should consider before investing in stocks is the change in exchange rates. If the baht weakens or strengthens, the investment strategy is different. If the value of money changes, it will affect the overall market, such as stock indexes, foreign investors, etc.

A study of the effects of exchange rates on Thai stock indexes in the past by Tsai, I-C. (2012). The relationship between stock price index and exchange rate in Asian markets: A quantile regression approach. Journal of International Financial Markets, Institutions & Money, 22, pp. 609-621, in January 2003 - end of June 2013. Found that the US dollar exchange rate against the baht and the Euro against the US dollar affected the Thai Stock Market Index as follows;

If the baht weakens, foreign investors' outflows from the Thai stock market. As a result, the SET Index fell. At the same time, the holding of the baht makes foreign investors lose the foreign exchange.

If the baht strengthens. Investment from foreign investors will flow into the Thai stock market. The stock index rose. Meanwhile, foreign investors have gained 2 profits, first from the appreciation of the baht and second from share price increases.

For example, in early 2000, the Thai stock market was trading at around 470 points. The baht was at around 37 baht per US dollar. But since the middle of the year. Thai stocks continue to decline and at the same time, the baht weakened to 44 baht per US dollar. And when the Thai stock market recovered from 2001 until the subprime crisis. The Thai stock market continued to rise and closed at 858 points in December 2007. Meanwhile, the baht strengthened to 33 baht per US $.

During the subprime crisis, The Thai stock market was affected. By the end of December 2008, the Thai stock market was trading at 449 points. The baht weakened to 35 baht per US dollar. And after the crisis, the Thai stock market moved up again and baht strengthened as well.น

As described above, when the baht strengthens will attract foreign investors to invest in Thai stocks. For example, on January 1, 2017, the Thai stock index was at 1,300.98. The baht was at 35.83 baht per US dollar. Assume that foreign investors bring in $ 2,000,000. Thai baht exchange 71,660,000 baht, then buy Thai shares.

Until September 30, 2018, foreign investors decided to sell Thai shares. The stock index closed at 1,756.41 points, the baht was at 32.39 baht and the index gained 455.43 points (1,756.41 – 1,300.98) or 35.01%. And when it is redeemed in US dollars will be US $ 2,212,411.24. Foreign exchange gainers account for a total of 45.63%.

So, if the baht strengthens, more fund will flow in the stock market. The stock indexes and stock prices rose. Daily purchase volume is high. The investment climate is lively, investors continue to invest. Conversely, if the baht weakens, pressure on foreign investors to sell stocks. As a result, the stock index fell.      

Like the introduction, exchange rates are just one factor for considering investment decisions, so investors must consider other factors as well. While the Thai baht depreciated, there were stocks that benefited directly, such as export-oriented stocks.

On the other hand, there are some stocks to invest in the strong baht, such as businesses that sell goods in the country, importers from abroad to sell or business that imports raw materials from abroad to produce and sell products in the country.


So, if you look at the exchange rate trend, will understand the direction of the stock market and be able to make an investment strategy to be consistent with the situation. The result is investment success.