Can we profit from the recent EM turmoil?

I have always been contemplating the best strategy of allocating my savings between investments in various forms. I am in mid 20s and I believe this is the time when I possess the highest risk appetite.

With the recent turmoil in EM, valuation starts to look interesting and I started to take a deeper look into the possible options to getting some EM exposure in my portfolio. The property market has particularly caught my eye. In many EMs they share attractive traits such as high rental yield, strong economic growth, urbanization trend, etc. In many markets you could get a 5-year IRR of low teens and mid-to-high teens when you add leverage. These are obviously ballpark numbers and subject to other various factors such as occupancy rate, foreign ownership rules, tax, etc. Execution would not be easy given the time spent on studying the market, viewing and managing properties on the ground. These are not really my biggest concern as I know that if I take this seriously, put in enough hours and accumulate experience, there will be economies of scale and the effort will pay off 5-10 years down the road.

My largest concern lies in the inherent FX exposure. Amongst the numerous factors that could impact the IRR, I believe the return would likely be most sensitive to two factors - capital appreciation and FX fluctuation. With capital appreciation I believe this is still relatively more manageable by the investor. You could negotiate for a lower purchase price or a higher sale price, pick the right location, etc. But with FX fluctuation, it is mostly out of the investor's control - eventually it boils down to so many macro factors and the impact is so huge that it could wipe out all your capital gains.

This has naturally induced my search for the possible hedging solutions. Based on the preliminary research, it seems there are no existing providers of FX hedging solutions for retail investors. In the corporate world, you have a marketplace (essentially trading floor of a bank) which facilitates the matching of two opposite contracts so the bank could be completely hedged while making handsome (arguably these days) commission from these trades. It baffles me to see that such platform seemingly does not exist in the retail space. Maybe the small ticket size does not create enough commercial incentive, but I can see there is a strong demand for FX hedging solutions for retail investors. A proper hedging solution could mobilize the opportunity for funding in dollars / different currencies and the stabilize the return. That is big for foreign investors in EM.

Thoughts and comments are appreciated as always.

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Sep 5, 2018