How to make solid returns, portfolio from strong dollar


Ten external creditors handed Kenya relief by suspending the repayment of Sh42.65 billion loans across 2021. FILE PHOTO | SHUTTERSTOCK

Among the many challenges confronting investors this year is the dizzying rise of the US currency.

Year to date, the Dollar Index - a measure of the currency’s strength against a basket of rival currencies including the euro (EUR), Japanese yen (JPY) and British pound (GBP) – stood at the 103 mark as of 13 March 2023, down over one percent since August 2022, but still remains four percent higher compared to the same time last year.

An amalgam of factors including interest rates and monetary policy, inflation and economic growth, trade balances and perceived geopolitical risk (read Russian invasion of Ukraine) have resulted in a strong Dollar.

With the Federal Reserve chairman indicating early this month that interest rates are likely to head higher than central bank policymakers had expected, should Kenyan-based investors worry?

Here’s a rather long-winded answer to the question. Persistent weak Rand (South Africa) against the US Dollar in the 10-year period ending in 2021 negatively affected asset valuations.

As the Rand depreciated from US$8.10 to US$15.90, despite the Johannesburg Stock Exchange (JSE) All Share Index clocking an impressive 120 percent in returns, in Dollar terms, the index was only up by 11 percent.

Equally, the South African property market was affected. Takeaway: When the value of a major currency appreciates against the value of the domestic currency, you lose (regardless of whether your returns are local-currency positive).

You benefit from international investment not only in terms of profit on the investment but also in the form of currency fluctuation.

How can investors trade in a strong Dollar environment? The easy option is to diversify abroad, which is a fairly simple thing to do these days as nearly every major financial institution offers a smattering of global equities funds — some of those offerings are denominated in US Dollars.

If investors are wondering how much to invest, there’s a simple solution: about 60 percent of global stocks are listed in the US and about 40 percent of equities are listed elsewhere — a well-hedged portfolio could have the same distribution.

Of that 40 percent, about 28 percent of global stocks are traded on European exchanges and the other 12 percent are in emerging markets (mostly in China).

It wouldn’t hurt Kenyans to invest in foreign equities just in case the Dollar stays elevated. It just might be. Around the time of the last rate hike, the Fed had indicated rates could rise to five percent in 2023.

If you feel you can't stand currency volatility, then this is a worthy effort. By investing in a US-denominated international portfolio, you can build a solid portfolio mix and guard yourself against market volatility.

Of course, nothing is guaranteed. If the Fed believes the economy is done with rate hikes and the Dollar trends weaker, it may unwind any gains expected.

But again, if Kenyans import everything from US pharmaceutical products to American cereals and chewing gum, why should our investment interests be limited to a geographical boundary?

Seriously, with open access and changing markets, global market investing should no longer be on the back burner anymore.

The writer is the MD Canaan Capital.