African Investment Returns in US Dollars: How Currency Changes the Result

An investment can perform well in its home market and still lose value for someone measuring returns in US dollars. How? Exchange rates can change the final amount an investor receives when converting their money back into dollars.

This matters when investing across African markets, where securities, funds and other assets may be priced in local currencies. Understanding currency risk helps you look beyond the investment's headline return and assess what you might actually gain or lose in dollars.

1. Why Does the Currency of an Investment Matter?

When you invest in an African asset using US dollars, you may need to convert your money into the local currency first. Later, when you sell the investment or receive income, you may convert the proceeds back into dollars.

Your final return therefore depends on two things:

• Investment performance: How much the asset's value increases or decreases in its local currency.
• Currency performance: How the local currency changes in value against the US dollar.

The US Securities and Exchange Commission (SEC) explains that exchange-rate movements can increase or reduce returns from international investments. A foreign investment can rise in its local market while being worth less in dollars after currency conversion.

Read the SEC's international investing guidance for more information.

2. How to Calculate Your Dollar Return

For this guide, exchange rates are expressed as units of local currency per US dollar. For example, KES 130 per dollar means $1 exchanges for KES 130 before fees.

The basic calculation is:

Step 1: Convert your initial dollars into local currency.

Initial local-currency investment = Initial dollars × Initial exchange rate

Step 2: Calculate the investment's value in local currency.

Final local-currency value = Initial local-currency investment × (1 + local investment return)

Step 3: Convert the final value back into dollars.

Final dollar value = Final local-currency value ÷ Final exchange rate

Step 4: Calculate your dollar return.

Dollar return (%) = [(Final dollar value ÷ Initial dollar investment) − 1] × 100

These calculations exclude fees and taxes initially, allowing you to see the currency effect clearly.

3. Worked Example: When an Investment Gains Locally but Loses in Dollars

Suppose you invest $1,000 in a hypothetical Kenyan asset when the exchange rate is KES 130 per dollar.

Your initial investment becomes:

$1,000 × 130 = KES 130,000

Now suppose the asset increases in value by 10%.

KES 130,000 × 1.10 = KES 143,000

That looks like a successful investment. But the exchange rate has changed to KES 150 per dollar by the time you sell.

Convert your proceeds back into dollars:

KES 143,000 ÷ 150 = $953.33

Your dollar return is:

[($953.33 ÷ $1,000) − 1] × 100 = −4.67%

Despite the asset gaining 10% locally, you end up with approximately $953.33 before fees and taxes. The weaker local currency more than offsets the investment gain.

All figures are hypothetical and illustrate how currency movements affect returns. They are not forecasts or current exchange-rate quotations.

4. What If the Currency Strengthens Instead?

Let's keep the same initial investment of $1,000, the initial exchange rate of KES 130 per dollar and the 10% local investment gain.

Your investment is still worth KES 143,000. This time, suppose the exchange rate moves to KES 120 per dollar.

KES 143,000 ÷ 120 = $1,191.67

Your dollar return becomes:

[($1,191.67 ÷ $1,000) − 1] × 100 = 19.17%

The investment gained 10% locally, but your dollar return is approximately 19.17% because the local currency also strengthened against the dollar.

These examples show why local investment performance and dollar performance can differ significantly.

5. Do Not Forget Currency Conversion Costs and Other Fees

The calculations above exclude costs. In practice, converting money and investing across borders can involve several charges.

Consider the first example, where the investment's value converts back to $953.33. If the combined costs of selling and converting the proceeds were hypothetically $15, you would receive $938.33.

Your dollar loss would then increase from approximately 4.67% to 6.17%.

This is a simplified illustration, not a quotation of actual service-provider fees. Always obtain current fee schedules and exchange-rate quotes before transferring money.

The SEC's international investing guidance also highlights the additional costs and risks associated with investing internationally.

6. What Currency Risk Cannot Tell You

Currency calculations are useful, but they do not predict what an investment will earn.

Exchange rates can change unexpectedly because of economic conditions, interest rates, government policies and other developments. Investment prices can also fall, and the combined effect can produce losses larger than those shown in these examples.

Some markets may have restrictions on transferring money abroad, limited trading activity or delays in converting investment proceeds. These factors can affect when you can access your money and the exchange rate you ultimately receive.

Your result may also differ depending on when dividends are paid, when fees are deducted and whether you convert income immediately or retain it in the local currency.

If you invest through a US-listed fund, the fund's structure and currency exposure may differ from those of a direct investment in a local African security. Read the fund's prospectus to understand how its holdings and any currency-hedging arrangements affect your exposure.

The Bottom Line

African investments can generate attractive local-currency returns, but exchange rates can increase or reduce what you ultimately earn in US dollars.

Before investing, calculate your expected return in both currencies, obtain realistic conversion and transaction costs, and consider whether you could tolerate an unfavourable exchange-rate movement.

The return that matters is not only what your investment earns locally, but also what remains when you measure the result in your own currency.