Borrow Low, Deposit High

Tuesday, May 27, 2008

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Multicurrency distortions make multicurrency loans look better than they have for some time.

The current global credit crisis has created distortions that make many investments look bad. These same distortions have made leveraged multicurrency investments better.

Governments and central banks have lowered interest rates in numerous countries, including the U.S. This means that four currencies can be borrowed at Jyske Bank with low lending rates.

Those currencies are the U.S. and Singapore dollar, the Swiss franc, and the Japanese yen.

The rates, depending on the amount borrowed, are:

U.S. dollar: 4.125% to 4.875%
Swiss franc: 4.25% to 5%
Japanese yen: 2.5% to 3.25%
Singapore dollar: 3% to 3.75%

The multicurrency distortion is created because deposit rates on other currencies have risen.

Interesting deposit rates are on Turkish lira, Australian and New Zealand dollars, Icelandic króna, Hungarian forint, and South African rand.

These rates are:

Turkey: 14%
Australia: 6.875%
New Zealand: 8%
Iceland: 5.25%
Hungary: 7%
South Africa:10.25%

If one wished to leverage investments with the least risk (other than Forex), one could simply borrow the four currencies above and invest in deposit accounts in the six high-rate currencies.

Take, for example, an investment of $100,000 leveraged with a $200,000 loan of $50,000 borrowed in each of the four low-rate currencies. This raises $300,000 to invest.

The average loan rate (at the highest rate) is 4.21%...and $50,000 is invested in each of the six high-interest-rate currencies.

The average interest rate earned is 8.56%. The annual interest earned is $25,687.

The loan cost is $8,420. The income after loan payments is $17,267 or 17.26% on the $100,000 invested.

This is not bad. Such a portfolio is well diversified from a currency and geographic perspective. There is still a currency risk and investors should never leverage more than they can afford to lose.

Every investment has risk. The key to good multicurrency investing is to be sure that the premium you are paid for taking the risk is good.

In my opinion, 17.26% is more than a fair premium, but we can do even better with bonds, as I’ve been discussing in my multicurrency education service.

Gary Scott
For International Living

Editor’s note: Gary Scott, a longtime friend of IL, has been analyzing and writing about global investments for more than 30 years. His multicurrency education service, which you can buy today for a dollar, teaches individuals how to create their own global, value-oriented investment portfolio that can take advantage of opportunities U.S. investors are often unaware of.

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