The ineffective management of fiscal policies and political uncertainty has aggravated the macroeconomic instability in Pakistan, creating a snowball effect in the currency market. The downgrading of ratings from Fitch and Moody’s has also impacted investor sentiments, which tanked the stock and currency market.
Last week, the Pakistani Rupee depreciated 7.4% or Rs. 17.4 against the US Dollar, falling to Rs. 228.37 against the greenback in the interbank market. The onslaught of the dollar continued throughout the last week as it reached Rs. 230 at one during trading on Friday.
|Cause of Rupee Depreciation|
|Tips for Investors to Mitigate Currency Depreciation Risk|
|Best Investments in Declining Currency|
Cause of Rupee Depreciation
One of the factors causing the freefall of the rupee was the victory of Pakistan Tehreek-e-Insaf (PTI) in Punjab bypolls that eroded the confidence of the markets in the government. However, according to the State Bank of Pakistan (SBP), this massive depreciation is largely due to a global phenomenon as the recent surge in USD has impacted developed and emerging market currencies significantly.
In the statement, SBP mentioned the hike in interest rate as announced by the US Central Bank, which resulted in the 18% depreciation of the rupee against the USD in the last six months. They have further added that the recent movements in the local currency are in line with the market-determined exchange rate system.
But, market players are expecting turmoil in the coming days as they think the government will not do the necessary economic reforms which are agreed in the IMF agreement. This is reflected in the depreciation of the rupee and the fall of the stock market.
All these circumstances push citizens to look for investment options. But, before investing in any asset class, you need to understand a few things that can help you minimise the effects of rupee depreciation. Get to know rupee stabilization.
Tips for Investors to Mitigate Currency Depreciation Risk
It is important for any investor to account for currency depreciation in an investment strategy. Graana.com, Pakistan’s smartest property portal, shares some tips for investors below to mitigate any rupee depreciation risk in the future.
Evaluate the Market
Look at the inflation figures, stock and currency trends in the past few days. This will help you evaluate market sentiments as, in most economies, these factors are directly linked to each other. For instance, if a developing country has a high inflation rate, then there is a strong chance of a decline in the local currency.
Create a Diverse Portfolio
To minimise risk, you need to invest in different assets rather than focusing on a single asset class. For instance, if you have put all your money in stocks, then there is a likely chance of facing losses as the country is dealing with unstable economic conditions. This is why it is important to not put all your money in one basket.
Use Less Volatile Hedges
In the current situation, it is better to invest in non-volatile assets that usually perform better in a high inflationary environment. These hedges protect you from rising inflation and declining currency. By using hedges in your portfolio, you can reduce rupee depreciation risk.
Use Wealth Management Services
If you want to minimise the risk of currency exposure, then you should use a wealth management service as they can make a custom financial plan for your needs. They can tell you about all the risks involved in certain investment and guide you on several options that can offer a good return on investment.
Best Investments in Declining Currency
No matter how strong or weak a currency is, there are some physical assets that are least affected by different economic conditions. However, you need to keep in mind that no asset is entirely safe from the current economic situation. Yes, they perform well compared to other assets, but it doesn’t mean they are immune to currency fluctuations.
Following are some of the best investment options in these tough economic times.
Real estate is one asset that outpaces inflation and rupee depreciation. There is some impact of depreciation in the construction sector, but apart from the increase in prices of materials, property prices also go up. You can take a look at property data for the last 10 years where the prices of real estate have increased significantly, making it an excellent option for investors. But, the question is how investors can use real estate to take advantage of the current economic situation. There are different ways to do it, which include:
- Buying a rental property
- Investing in REITs (Real Estate Investment Trusts)
- Buying a house
Through rental property, you can earn a steady income on a monthly basis. You can also use the rental property to gain profit as the value appreciates with time.
Gold and Other Precious Metals
These are such commodities that are valuable for investors during a high inflationary environment. Historically, investors have used gold to protect themselves from volatility in the market. When inflation increases and the value of the paper money falls, the prices of precious metals like gold increases significantly, making it an inflation-proof investment or, as some say, recession-proof investment.
The Pakistani Rupee is depreciating due to a wide range of factors like current account deficit, a decline in foreign reserves and domestic uncertainty. Hence, most services and goods will cost more as the money you have in the bank will be worth less. This is why you need to deploy various hedges to save yourself from currency fluctuations. For more related guides such as Why Invest in Real Estate During Currency Depreciation, visit Graana blog.