Understanding Currency Risk in African Investment Portfolios

Of all the variables that determine investment outcomes in African markets, currency dynamics are among the most consistently underestimated. They are present in every cross-currency investment, they interact with every other risk in the portfolio, and their impact on returns — for better and worse — can exceed the impact of the underlying asset's performance.

Yet they are frequently treated as a secondary consideration, addressed after the investment decision has been made rather than embedded in the analysis from the outset.

The cost of this sequencing error is significant and, in retrospect, almost entirely avoidable.

Currency risk in African investment portfolios takes several distinct forms, and each requires a different analytical response.

The first is direct exchange rate exposure: the risk that the currency in which an investment is denominated depreciates against the investor's reference currency. For a US dollar or euro-denominated investor holding a local-currency asset in an African market, a 20% depreciation of the local currency eliminates 20% of the return in reference currency terms — regardless of how well the underlying investment performs.

This form of currency risk is the most visible and the most commonly acknowledged. It is also, in many African markets, the most significant. Several African currencies have experienced periods of sharp depreciation over the past decade, and the timing of those depreciations has frequently coincided with broader periods of economic stress — precisely when investors are least well-positioned to absorb them.

The second form is more subtle: currency volatility that affects the operating performance of the businesses held in the portfolio. A business that imports raw materials priced in US dollars while generating revenues in local currency faces a direct margin squeeze when the local currency depreciates. The investment may be denominated in local currency, but its fundamental economics are partially dollar-linked. Understanding this pass-through effect requires a more granular analysis than standard currency risk frameworks typically capture.

The third form is the opportunity dimension: the possibility that currency appreciation against the reference currency amplifies returns from a local-currency investment. This form of currency exposure is often ignored entirely in risk discussions, but it is real and, in some African markets over some periods, has been a significant contributor to total returns for foreign investors.

The practical implication of these three forms is that currency exposure in an African market portfolio is not simply a risk to be minimised or hedged. It is a variable to be actively analysed, understood in its specific form for each investment, and accounted for as a component of the return thesis rather than a modifier applied afterwards.

Building currency considerations into the investment process from the outset changes the analysis in several ways.

It changes how assets are valued. A business that appears attractively priced in local currency terms may appear significantly less so once the probability-weighted currency trajectory is incorporated into the return model. Conversely, a business that appears only moderately attractive in local currency terms may represent a compelling opportunity for a reference-currency investor who has a differentiated view on the currency trajectory.

It changes how positions are sized. An investment with significant currency risk — whether through direct exposure or through operational pass-through — warrants a different position size than an equivalent investment with limited currency exposure. Portfolios that size positions without accounting for this variable tend to carry more currency concentration than they realise.

It changes the risk management framework. For portfolios where currency risk is a meaningful component of total risk, monitoring the currency dimension of performance separately from the asset dimension provides information that aggregate performance numbers do not. Understanding whether a portfolio's returns are being driven by asset selection or by currency movements is essential for evaluating whether the process is working as intended.

Finally, it changes the conversation with investors. Currency risk in African markets is real and can be significant. Investors who understand it in advance — who have had an honest conversation about the scenarios in which currency movements could materially affect their returns — are better prepared to maintain their positions through periods of currency volatility. Investors who are surprised by currency dynamics are more likely to exit positions at the wrong time, crystallising losses that a longer holding period would have recovered.

Currency risk in African market investing is not a reason to avoid these markets. The returns available from well-constructed African market portfolios — accounting for currency dynamics — remain among the most compelling in the global investment landscape. But they are returns that reward investors who engage with the currency question honestly and systematically, not those who treat it as a footnote.