INVEST in local currency and earn foreign currency? What sorcery is this? Investing in assets that pay interest in a stronger currency while the principal investment is in a weaker or more volatile currency can be an effective investment strategy to hedge against devaluation risks — no sorcery or magic involved. This approach not only helps protect the investor’s capital but also ensures that the returns are preserved in a more stable or appreciating currency.

Currency devaluation occurs when a country’s currency loses value relative to other currencies. This can happen due to various factors such as economic instability, inflation, political turmoil, or unfavourable trade balances. For investors, holding assets in a devaluing currency, the real value of their returns diminishes when converted to a stronger currency, eroding their purchasing power and overall wealth.

To mitigate the risks associated with currency devaluation, investors can look for investment opportunities that involve holding the principal in a weaker currency but receiving interest payments in a stronger one. This strategy is often employed in emerging markets where the local currency may be subject to high volatility and devaluation.

An investor could use local currency to purchase shares on their local stock exchange in a company that hold assets, generates revenue, or conducts significant portions of its business in a stronger currency. By doing so, the investor locks in returns that are insulated from the local currency’s depreciation.

Receiving interest payments in a stronger currency provides a natural hedge against the devaluation of the weaker currency. This helps preserve the real value of the investment returns. Additionally, stronger currencies like the US dollar or the euro are typically less volatile and more predictable compared to currencies from emerging markets. This stability can provide investors with more predictable income streams and greater confidence in their investment returns. Last but not least, investing in assets that pay interest in a different currency adds a layer of diversification to the investor’s portfolio. This can reduce overall risk, especially in volatile economic environments.

However, the investor should bear in mind that the underlying economic and political stability of both the weaker and stronger currency regions can impact the relative strength and stability of the currencies involved.

In conclusion, investing in assets that pay interest in a stronger currency while holding the principal in a weaker currency can be a prudent strategy to hedge against currency devaluation. This approach helps protect the investor’s returns, adds stability to their income, and enhances portfolio diversification — all of which are crucial in uncertain economic climates.

Toni-Ann Neita-Elliott, CFP is the vice-president, sales & marketing at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual, and institutional investor. Visit our website at www.sterling.com.jm.

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