A little on currencies & resilience
Investments experience volatility quite like our lives sometimes do — with rapid and unpredictable change.
Markets embrace volatility as a feature, despite all outcomes. Do we?
In this edition:
An example of currency devaluation hitting foreign investors
Be willing to start over to win
Considerations to make on currency when investing
Also, a little on the Trump rally and crypto the news.
RUNDOWN
One way currencies affect your investments
The story
Safaricom first-half profit drops as Ethiopian Birr plummets [Read]
Safaricom trims forecast on Ethiopia's birr depreciation [Read]
What happened?
Safaricom, Kenya’s biggest telco (and/ or technology company) announced its half-year results last week. Earnings Before Interest & Taxes (EBIT) grew 31.9% BUT Net Income dropped by 17.7% to KES 28.1bn from KES 34.1bn. The reason? Devaluation of Ethiopia’s Birr which lost 106% in value against the USD in 3 months.
Between the lines
In July this year, Ethiopia shifted to a market-based exchange regime, allowing the Birr’s value to be determined by open market demand & supply.
For foreign company Safaricom, this drastically increased the cost of servicing debt and the cost of local expenses in Ethiopia such as leases.
For its Ethiopian operations, Safaricom will earn revenue and pay expenses mostly in the local currency. Beyond this, it will finance big costs in foreign/ hard currency. However, as the Birr loses value, Safaricom ends up needing a lot more local currency to pay back these obligations.
Should you care?
As a result of this first half performance and further exchange rate uncertainty in the country, Safaricom has trimmed its full year forecasts.
The company also said it will take them one more year to break even in Ethiopia. They remain optimistic about growth in the long term. The stock price on the NSE fell by as much as 3.4% on the day in reaction to the announcement.
Because we live in a global market, currency movements will often impact your investments in different ways. Exposure through significant investment in another country is one.
ROUNDUP
Money left on the table
These are my news picks from the week:
Safaricom’s CEO discussed their earnings - he feels their shares are undervalued by 50%
The Kenya Revenue Authority has raised its tax revenue targets from the Crypto sector for this year to KES 60bn from KES 10bn collected in the year ending June 2024.
The post-election ‘Trump rally’ has seen Bitcoin and other cryptocurrencies hit new highs. Bitcoin crossed a new high of USD 93,000 last week.
Kenya’s CMA approved new funds and the Collective Investment Scheme market crossed KES 300bn in the period ended September 2024 led by Money Market Funds which accounted for 62% of managed funds (KES 196.8bn).
NOTES TO SELF
To win, you must always be ready to begin again
Playing competitive sports offers a great opportunity to check and develop resilience.
Last weekend I attempted a comeback to the courts for Sunday basketball. I felt a little better prepared than the last time. Mentally at least.
To get warmed up, one of the guys suggested we play a variation of a shooting knockout game called ‘Around The World’.
In this game, all players shoot the ball in order from about 13 different predetermined positions. You advance to the next position with each shot you make. If you miss a shot, you remain in your spot until it's your turn again. But if a player behind you in the order makes the shot at your spot before you do, you return to the beginning & start again.
Lucky for me, I never got passed. But the built-in lesson of the game wasn’t lost on me. The further ahead I got, the harder it would be to win the game if someone knocked me back to the start.
How reminiscent of life this is.
I’ve learned through my own experiences and those of others, that in the big bets, starting over when you fall is a given. Every failure tests your ability to come back. And the bigger the pursuit, the bigger the consequence of either outcome.
It comes down to risk and our relationship with it.
"We take risks all the time, we talk about failure. We need big failures in order to move the needle. If we don't, we're not swinging enough. You really should be swinging hard, and you will fail, but that's okay." — Jeff Bezos
When pursuing big goals, you're not going to make all the shots the first time around. You may also get knocked out on the 12th shot. When this happens, do you quit, or chin up and get going with the 13 shots ahead?
Each time another player had the ball, I had to think about that.
We face this reality each time we take a chance on ourselves.
A resilient mindset develops by being ready for all outcomes - for or against you - and being ready to start over if that’s what it takes to win.
THE BUFFET
3 ways currency fluctuations can impact your portfolio
As global markets become more connected, understanding currency movements is essential for you to manage risk and optimize return.
Here are 3 ways to consider currency movements when investing:
International investments: If you hold investments denominated in another currency, changes in the value of that currency vs your home currency will be directly translated into the value of your investments even if all else remains constant.
Export-heavy companies: If you invest in companies that earn a lot of their revenue from exports (e.g. a tea or coffee exporter in Kenya), their revenues will increase when the local currency weakens.
Foreign debt exposure: If you invest in a company that has significant debt in foreign currency, it may face higher repayment costs if their home currency weakens, potentially weakening financial performance.
This list isn’t exhaustive but hopefully gives you something to start thinking about. Understanding these dynamics will help you make more informed investment decisions.
“If you think you can do a thing or think you can’t do a thing, you’re right.”
— Henry Ford
We can always prepare better for volatility by staying informed and being awake to multiple possible outcomes.
Have the best week possible.
AG