Watching the USD/COP is naturally one of our favorite past times here at Casacol. Every single day our clients are monetizing large amounts of funds, and if you’re reading this article you either have funds invested in Colombia or are at least thinking about it. Therefore I think it warrants an up to date discussion about the current status of the COP and some potential outcomes for the short and long term time horizons.
I’m often asked by our clients, “where do you think the COP is headed?” and my answer is always the same: “I have no idea and I don’t think about it a lot.” As real estate specialists we can help control 1) our clients ability to acquire high quality properties that suit their investment goals and 2) we can manage it (I think) better than anyone else. These are naturally the two key variables of real estate investing (acquisition and management). But currencies are something we have no control over, so why fret?
As some of our older, Colombian clients have reminded me, it was only 20-25 years ago when the COP was a lot closer to 1000 (a strong COP!) and this was even during times of USA “strong dollar policies” through the 80s and 90s. And yet for the last 12 months, the USD/COP trade has been pretty much range bound within 2900-3100, with fairly limited volatility and few economic events to move the needle up or down. However it is during these periods of LOW volatility that my finance friends in New York remind me that usually precede some kind of external shock (oil related, war, crisis, etc.) that sooner or later, really gets currencies moving.
I tend to hear a lot of negativity from Americans about their own economy and the USD dollar in general. A lot of, “I know it’s going to crash one day, so let’s diversify now!” And while we are happy to help our clients diversify beyond their USD/CAD/GBP/CHF/EUR/AUD/ETC holdings and into COP, I don’t recommend doing it ONLY because you think your home currency might crash (it probably wont). You should buy Colombian real estate if you think it fits within your portfolio and because you think it’s a good investment. And over time if the currency benefits you, consider it a bonus that just magnifies your returns.
Now personally I have my bets. In the 1-2 year time frame I’m betting the COP stays low (and USD relatively high) for longer than we might expect. And long-term, I think Colombia should outperform it’s emerging market peers and therefore receive a comparatively higher currency valuation vs. the USD as a result that sets us back on a path closer to 2000 than 3000.
What are the most important variables I think about?
1) Oil Prices – could stay “low” or go lower as the world moves to renewable energy, and innovation in fossil fuel extraction (shale, fracking, tech, etc.), and especially over the long term (20-30 year time horizon). Caveat: war/OPEC can always affect oil prices in strange ways, but let’s stay positive for now.
2) USD Safe Haven – There is no currency that the world wants more of than USD, period. And especially during any war or economic crisis (even if the crisis is born in the US!) the USD will tend to surge. The EUR, RNB do not appear to be contenders to the USD any time soon. Good WSJ article on this recently here.
3) US economy – A new US tax bill will encourage economic growth as well as the repatriation of hundreds of billions of USD from foreign currencies back to USD held by American companies overseas. This only increases the demand for dollars as does higher interest rates which is the current Fed trend. US stock markets at all time highs are (for the moment) bringing lots of foreign investment into USD as well.
4) Colombian economy – At least in the short-run, the Colombian economy is going to have it’s ups and downs. At the moment, interest rates are moving down, inflation is warm, real GDP/employment up, Venezuelan immigration pros/cons. And long-term, a young educated population, a large diversified economy, the peace treaty, generally good economic policies, proximity to the United States, LATAM trade integration, global tourism and investment interest, are all variables that will unfold over 5, 10, 20, 30 year time horizons and yield (I think) a much stronger COP (vs. USD) over time.
I think (hope) the window of currency opportunity (~3000) will stay open for a good while still, and long-term lots of new entrants will be brought into the Colombian economy and real estate market.
I also see a lot of our clients go crazy when the currency moves more than a few basis points. I don’t think anyone needs to be in a rush in/out. If you think Colombian real estate has a place in your investment portfolio then focus your time on finding the best assets vs. the best exchange rate. Focus on yield, location, liquidity, appreciation potential. Focus on the assets that people will find even more desirable in the future than you find them today. Have a long-term (at least 5 year) time horizon and I think we’ll all do really, really well.
So with that, cheers to checking the $XYZ/COP every day (or twice a day) just to keep an eye on things. Feliz Navidad and Happy holidays to everyone.
Brad Hinkelman – [email protected]
Founder/Owner – Casacol SAS