CHOOSING AN investment in this economic environment can prove to be a challenge. Many Jamaicans invest in and are comfortable with money market instruments such as Treasury Bills and repurchase agreements, popularly referred to as 'repos'. But with interest rates on this option steadily trending downwards, investors are looking for other viable opportunities.An alternative is the stock market. The money and stock markets operate inversely, so, usually when interest rates in the money market are trending downwards, the stock market tends to do well. Unfortunately, with events such as the suspension of Dyoll by the JSE, investors are taking a 'wait and see' attitude towards the stock market.
So what then is left to invest in? One option is to diversify your portfolio by investing in hard currencies such as U.S. dollars, Canadian dollars, Pound Sterling (£) and euros.
Of these, the euro is perhaps the least popular. This week we examine another vehicle to help you preserve your wealth - the euro repo.
SHORT-TERM DEBT INSTRUMENT
As stated throughout this series, a repo is a short-term debt instrument that usually has tenures ranging from 30 to 365 days. A repo denominated in euro is termed as a Euro Repo. The euro is the official currency of 12 European nations namely Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain and The Vatican.
In Jamaica, these euro repos are secured by eurobonds issued by the Government of Jamaica. To refresh your memory, a eurobond is a security floated by a government in a currency other than their local currency. GoJ eurobonds (global bonds) are usually denominated in euro or U.S. dollar.
This investment is ideal for those who earn, invest, trade, or otherwise conduct business in the euro currency. Jamaicans returning home from overseas should also include this instrument in their portfolio as it gives them the option of carrying home their money enabling them easy access without converting to the local currency.
Why invest in Euro Repo?
RELATIVE STRENGTH
When compared to the U.S. dollar, the euro is relatively stronger. The euro's strength over the U.S. dollar is due to several reasons, including the low growth of the U.S. economy and the country's trade (and budget) deficit. This trade deficit is approximately 5.6 per cent of gross domestic product (GDP). Experience shows that a deficit of five per cent or higher makes the currency more susceptible to currency depreciation.
LIQUIDITY
The euro repo is offered in tenures of less than a year, so your money is not locked away for long periods. On maturity, your principal is repaid with interest. And because the interest rates are fixed you can easily choose the tenure which best provides the cash flow you need to meet expected expenditures.
CAPITAL PRESERVATION
Investing in the euro protects you from devaluation against our local currency and the U.S. dollar. If you are a returning resident from the U.K., conduct business with European partners or currently hold eurobonds, the euro repo presents you with a viable short-term option that protects your money's value.
WHAT IS THE BEST WAY TO INVEST IN EURO DOLLAR REPOS?
As with all investment choices, it is important to match your instruments with your goal. Always keep in mind your risk tolerance and timeline. If including euro repos in your portfolio, you may consider using a 'laddering' method.
Place money needed in the very short term on the shorter tenures such as 30 or 60 days. Funds which you can invest for longer should be placed on tenures of 180 days or longer to maximise your returns.
Of course, euro repos are not for everyone. Your portfolio should reflect your unique wealth objectives. If at anytime you need expert guidance, contact your wealth manager.
We welcome your comments at info@ncbcapitalmarkets.com.
Taken from The Sunday Gleaner, March 27, 2005
