The Dollar's Strength is Giving Rise to Investment Opportunities in Underappreciated and Overlooked Emerging Markets

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By Cole Shephard & Adam Jason

Many U.S.-based investors tend to look only at the investment opportunities that are right in front of them: assets and businesses in the U.S. market. Perhaps the outlier is the occasional overseas vacation home. Being solely U.S.-focused is a mistake under current investing conditions for those with U.S. dollars to deploy. As the U.S. dollar holds strong against other global currencies, dollar investors, with their increased spending power, have a huge market opportunity to outcompete non-dollar investors in foreign markets.

The current market opportunity for U.S. investors is a result of: (1) a historically strong dollar, (2) overpriced investment opportunities in the U.S., (3) decreasing prices for assets and businesses abroad and (4) decreased competition for foreign assets and businesses for those who can compete with dollars. These ingredients are creating a moment for dollar investors that could come only once every few decades - a perfectly constructed moment for U.S. dollar arbitrage. Of course, many of the factors above are also useful to dollar investors who live outside the U.S., but we have focused this discussion on the domestic U.S. investor who should be comparing options between home and abroad.

The U.S. Dollar Index - the measure of the strength of the U.S. dollar versus a basket of foreign currencies such as the Euro, Japanese Yen and Swedish Krona - is currently heavily lopsided in favor of the dollar at levels not seen since the bubble of the early 2000s. As compared to emerging market currencies like those of Latin American and many Eastern European nations, the strength of the U.S. dollar is even more pronounced than against the more established currencies in the U.S. Dollar Index.

At the same time, asset prices in these emerging markets are dropping as local buyers struggle to access reasonably priced debt financing for real estate and capital investment. Foreign countries are following the path of the U.S. Federal Reserve and raising their own borrowing rates. As debt becomes more expensive, assets are naturally becoming more reasonably priced and competition for them is decreasing, with those who do not need access to local credit having the upper hand. A strong dollar, less competition and falling prices creates the buying opportunity for dollar investors.

Dollar investors face, among others, the following investment decision: Do I stay local and wait for traditional investments like real estate and public markets to normalize and lose some of their volatility, or is now the time to look abroad for new investment opportunities?

In Colombia, for example, we can see these market dynamics at work. We have seen the dollar increase in strength from 3,700 Colombian pesos (COP) to each $1.00 to over 5,000 COP per $1.00 in the last six months alone. This 35% increase in the strength of the U.S. dollar to COP has made the market for Colombian assets and businesses that can be purchased or invested into in dollars incredibly attractive. Colombian assets purchased today, if held until the strength of the COP against the dollar returns to historical levels, which we expect to occur as global interest rate increases taper, could yield a 35% increase in appreciated value simply as the currencies normalize to the ratios that we have seen over the past few years.

To demonstrate this dollar buying opportunity in practice, we purchased several major coffee operations here in Colombia in 2022 in dollars at nearly the same prices on a Colombian peso basis, but at two-thirds less on a dollar basis, as when we considered acquiring them several years ago.

In countries where the rule of law over private property is respected, purchase power opportunities like this are a great diversification option. In other words, we look for opportunities where foreign direct investment is highly encouraged (like Colombia, Poland and Romania).

We have personally seen the strength of one currency against another motivate investment decisions in the past at the highest levels of corporate finance. When the euro was floating at strong price points compared to the dollar from late-2010 into mid-2014, we advised some of the world’s leading corporate clients on mergers and acquisition activity on both the buy and sell sides of transactions where currency strength was relevant to a decision whether to act. As we saw then and as we are seeing now, changes in currencies can provide tremendous investment opportunities.

Who knows what the waiting time will be for U.S. assets to return to attractive levels. Despite a recent market correction, public equities are still expensive as compared to price to earnings ratios we’ve seen during other bear markets. Real estate prices continue to be, in many cases, just recently showing signs of deceleration. How far they will come down from post-COVID historic highs, we don’t really know. Prices attractive to investors may be a ways away. At the same time, the cost of debt financing is likely to continue to rise due to the U.S. Fed’s decision to keep increasing interest rates for the foreseeable future. These rate increases will only make investments more expensive to finance for investors needing to borrow.

For investors with capital on the sidelines, leveraging their strong dollars in foreign markets where they are comfortable investing is the investment arbitrage opportunity that they are unlikely to find close to home.

About the Authors

Cole Shephard is the founding partner of the alternative asset manager, Legacy Group, and the founder and a board member at the Green Coffee Company. As a former PwC alum working in accounting, advisory and consulting solutions across the United States, Bermuda, Hong Kong and Beijing, Cole is an expert in emerging markets and understanding the capital movements of high-net-worth investors.

Adam Jason is a partner at Legacy Group and a board member at the Green Coffee Company. He is an attorney specialized in corporate finance, governance, securities regulation and international business transactions. He has advised Fortune 500 companies and investment banks, including JP Morgan, Morgan Stanley, Citibank and Goldman Sachs, through initial public offerings (IPOs) and offerings of debt and equity securities exceeding an aggregate of $10 billion.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Legacy Group

Legacy Group is a leading investment firm in Latin America with a strict focus on high-quality LATAM businesses for international high-net-worth & accredited investors that can produce outsized returns.

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