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LEFT: Christopher Chin Loy, head of structured products and stockbrokerage services at Scotia DBG Investments.
RIGHT: Joan Edwards of Jamaica Money Market Brokers Limited.
Avia Collinder, Business Reporter
If you intend to book a so-called flight to quality, that is, transfer all your savings to greenback instruments because of last year's 14 per cent depreciation of the Jamaican dollar, here's a piece of advice: Slow down!
Before engaging in any wholesale ditching of Jamaican dollar instruments, do the math.
Calculate interest rates on either currency, for instance, against rates of devaluation and inflation to determine whether, really, you are getting the best return.
And in any event, analysts say, it is hardly ever recommended to overload your portfolio with a single currency.
It is better to hedge. Moreover, the certitude that surrounded investments in Uncle Sam's currency evaporated with last September's of America's financial markets.
"We have seen traditional long-term investments, such as bonds, plummet, with some investors losing, at least on paper, as much as 60-70 per cent on what some considered a safe investment in government and corporate bonds," said Christopher Chin Loy, head of structured products and stock brokerage services at the investment bank, Scotia DBG.
Added Chin Loy: "Mutual funds, which are considered a managed-risk approach to investing globally in equities, have seen declines in value of more than 40 per cent over the past year."
All of which, analysts stress, is not a prescription in favour of Jamaica currency saving, but an invocation against acting in ignorance.
So Joan Edwards, head of personal portfolio management at Jamaica Money Market Brokers, suggests that investors gather the facts, like:
That, though, is not the case with the Jamaican dollar, its 14 per cent slippage in value last year notwithstanding.
If, for example, between last November and December someone had invested in, say, a Government of Jamaica fixed rate instrument; that investor would still have a nominal return, 25 per cent, which, even after adjusting for depreciation of 14 per cent devaluation, would still be positive by 11 per cent.
"The rate of return on Jamaican dollar instruments usually accommodates for any decline in the real value, based on inflation and the exchange rate," explained Scotia DBG's Chin Loy.
"In many cases, one actually loses value when they save in US dollars in a Jamaican environment."
He added: "This is mainly because, as Jamaican dollar consumers, which we all are since we all live here, we then have to pay all our bills in Jamaican dollars at prices that are adjusted annually at our Jamaican rate of inflation.
Therefore, Jamaican dollar yields are normally adjusted to keep apace of the rate of increase in prices (that is, inflation).
"However, the same is not true for US dollar investment yields locally, and worse overseas where they are almost always significantly lower, due to, again a peg of their rates against US inflation rates.
"So, if one is maintaining savings in US dollars at, say, five per cent interest locally, in an inflationary environment of 14 per cent, then you are actually experiencing a loss of nine per cent in real terms.
Adjust this for a devaluation which generally is no more than five per cent per annum, then your rate of return is still minus four per cent."
Be careful
Short-term investors, in particular, should be careful about their moves, given that, as Chin Loy explained, "the spread between the bid and the offer for US dollars is generally significant enough that if one tries to buy and sell on a short-term basis, there would actually be a loss incurred."
"A perfect example is today's $89 offer and $87.90 bid," he said on Friday.
"That is a spread of 1.25 per cent. So, persons saving in US dollars month-to-month that were converting at 89, and then converting back to pay bills at 87.90 would actually lose 1.25 per cent immediately, as compared to only earning 0.42 per cent on their savings investment on a monthly basis (five per cent divided by 12)."
avia.ustanny@gleanerjm.com