• How to invest in the middle of capital flight

    by  • March 3, 2013 • Investing • 0 Comments


    Last week we were treated with a scene of full-blown capital flight from both Cyprus and the Euro-zone in general as international investors lost confidence in a big way. Although the situation has since diffused with the markets get used to an all new level of volatility in the Euro due to political risks, there is no doubt that the global investment environment shifted as a result of the changing climate. As such, personal investors need to take a minute to re-evaluate the landscape, and look to see how it is that they can mitigate the risks of capital flight in Europe.

    Capital flight from a foreign currency creates risks for us here at home by destabilizing international demand. It shifts savers from one part of the world to another, and might also require these individuals to take their money out of the markets to accommodate their shift away from the Euro-zone. While it is possible that foreign investors might indeed take this as an opportunity to change their currency into USD, we can’t rely on that level of speculation to secure our retirement accounts.

    growing-investmentFrom there, we also need to be aware of how it is that this kind of currency shit impacts international demand for products being exported from the US. Specifically, because of the way in which a flight from the European currency will result in a decrease its actual price, the entire continent will be less able to afford to import goods. This becomes particularly important for commodities, where importers are extremely price sensitive.

    The shift in the currency price to a higher magnitude might just be enough to reduce their ability to continue purchase as high a volume of commodities as before, to the point at which it has a material impact on the overall global demand for these commodities. As such, American crude and natural gas companies might be at risk, while copper and metal producers in general face risks associated with reduced infrastructure development in the Euro-zone going forward. So with all of this currency and commodity risk on the table, how is it that we remain in the market without putting ourselves at some pretty substantial risks going forward?

    The trick to keeping money safe in the midst of capital flight is to stay tangible, local, and reasonable. This means sticking to hard assets that produce a yield, with minimal exposure to demand or currency volatility. An associate of mine demonstrated this strategy perfectly by buying into a local parking lot project in his home city. He knew the area, he liked the opportunity associated with parking demand in the area, and he saw a reasonably safe investment in the way that the capital structure did not expose the company to excess amounts of risk.

    Lastly, because of the way in which the company was structured, he was able to buy in within his means, without having to borrow or over-extend his portfolio. The end result was a situation where he was able to begin earning a yield, secured against a tangible asset, after a three year down-time, and eventually even cash out at a very reasonable (but not excessive) profit.

    Not sure if you’re in a position to access private equity ventures? No problem, start looking instead for ETFs or Mutual Funds that provide similar exposure. For example, consider a smaller REIT that provides isolated exposure to housing projects in your local area. From there, you can assess the demand for rental housing from your own experience (start by looking through ‘wanted’ ads in the newspaper to see if there’s a trend for more renters than landlords).

    From there, you can even take the time to schedule a viewing in one of the company’s units, to make sure that the assets are in good order, and that there isn’t any signs of mismanagement. While these positions will still be slightly less liquid than a larger REIT, they tend to provide a slightly better yield, and tend to remain relatively stable. The end result is that you can hold them as more of a fixed income security than a combination of growth and fixed income.


    Raymond is a retired banker from Michigan where he lives with his wife.

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