I recently took up jogging to help get my desk-bound self into some semblance of shape. But you won’t often see me pounding the pavement in suburban Lancaster. Why not? Because I prefer the treadmill.
You see, I have the rather obsessive need to gauge exactly how much effort I have expended each time I exercise. Running outside exposes me to all sorts of factors beyond my control: headwinds, extreme sun, extreme cold, barking dogs, etc. The treadmill, on the other hand, allows me to run my 3.1 miles in a controlled environment.
Unfortunately, there’s no “treadmill” for Africa investors. To participate in these markets, we need to brave the elements. Chief among these elements are currency fluctuations. I like to think of them as the uneven pavement of global portfolios.
Thankfully for control freaks like me, changes in exchange rates can be measured fairly precisely. The below chart shows how they’ve fluctuated against the dollar over the past few years.
African Currencies’ Performance Vs. US Dollar
| One-Year Return* | Three-Year Return* | |
|---|---|---|
| Botswanan Pula | (5.7%) | 13.6% |
| CFA Franc | 12.9% | 22.8% |
| Ghanaian Cedi | (10.3%) | (15.8%) |
| Kenyan Shilling | (0.8%) | 0.3% |
| Mauritian Rupee | 6.2% | 21.4% |
| Namibian Dollar | (5.5%) | 35.0% |
| Nigerian Naira | (2.8%) | (5.7%) |
| South African Rand | (5.5%) | 35.0% |
| Tanzanian Shilling | (3.1%) | (14.9%) |
| Ugandan Shilling | (0.0%) | (16.0%) |
| Zambian Kwacha | (9.5%) | 5.6% |
*As of February 29, 2012
In theory, we’d do well to invest in countries with strengthening currencies to take advantage of the tailwind that they offer. Alas, it’s far from easy to predict whether a given African currency is set to gain or lose value.
Here are a few factors that would cause a currency to appreciate.
- Increased world demand for the goods or services that a country produces. An increased demand for copper, for example, would tend to increase the value of Zambia’s kwacha, because copper is one of its main exports. But note this cuts both ways. If the price of copper drops, it would put downward pressure on the kwacha.
- Decreased domestic demand for imported goods. The less dependent a country is on foreign goods, the stronger its currency becomes. Kenya, for example, produces much of the food its populace consumes. This lessened dependence on imports, helps to keep the currency strong by reducing the supply of shillings in the foreign exchange market.
- High interest rates relative to foreign interest rates. Money flows to where it is treated best. Therefore, if Ghana increases its benchmark interest rate, investors will seek to purchase cedis to take advantage of the higher yields on offer. This reduces the supply of cedis, increasing their value.
- Expectations of currency appreciation. This factor relates to speculation. If, for example, currency traders expect South Africa will raise interest rates, they will buy the Rand in anticipation. This reduces the supply of Rand, and, therefore, increases its value.
As you can see, there are a lot of moving parts to consider. But fortunately for us, good investments need not be backed by strong currencies. After all, the market where we’ve seen some of the best stock performances over the past year, Namibia, also experienced a large currency depreciation during the same time frame.
So, we mustn’t spend too much time trying to divine the direction of the Shilling, Rand, or Pula. Given a minimum level of political and economic stability, stock in a good, bargain-priced business should post solid currency-adjusted returns over a three to five-year span.
PS. Here’s an interesting article on the limited impact of currency fluctuations on globally-diversified, long-term investors.