Be careful that past inflation does not disturb your fixed income decision – 03/25/2023 – From Grain to Grain

Most investors, when deciding their allocations, evaluate how each asset has performed in the last twelve months. This practice could lead us into a trap this semester when we decide between IPCA and CDI-linked assets. Explain what to do on fixed income.

Last year marked one of the biggest reversals in inflation since the Real plan.

Average monthly inflation was above 0.9% in the twelve months ending in June 2022. This number plummeted and became negative in July, August and September 2022. We had not faced such intense deflation since the beginning of the Real plan .

The effect of this is that, even with the increase in inflation observed in this first quarter of 2023, the twelve-month accumulated IPCA should fall to 4% in June of this year.

Therefore, the news we are going to hear is that inflation is slowing down and the pressure to reduce the Selic rate at this moment will be even greater than the current one.

However, care must be taken with this effect.

Investors looking at the 12-month accumulated IPCA drop may make the wrong decision to further reduce the portion of their fixed income linked to the IPCA and increase in fixed income assets referenced to the CDI, as this should still be at the same current level by August 2023. The CDI and the daily Selic are at 13.65% per annum at this moment.

So why should we be careful with this movement if the IPCA seems to be falling in the accumulated?

As shown in the chart below, this effect will be short-term.

In the last five months ended in February 2023, the average monthly IPCA is 0.6%. In February, the IPCA surprised the market and reached 0.84%. The expectation for March, collected by Anbima, is for it to be 0.76%.

Even if the average monthly IPCA drops to 0.45% in the second half of 2023, the accumulated IPCA in 12 months will accelerate again and should approach 7% in September this year. This occurs because months with negative IPCA last year are excluded from the composition of accumulated inflation.

Yes, it is likely that the economy’s basic rate, the Selic will fall from the last quarter of this year and by the end of 2024 it will already be only 11% per year.

Additionally, a review of the inflation target is not yet ruled out, which could open space for further Selic cuts by the Central Bank.

Therefore, it is important to maintain a proportion of the portfolio in IPCA-linked fixed income securities.

Considering the market stress window of opportunity, some corporate bonds of companies with good credit quality present even more attractive returns. When considering the IR exemption, the interest rate above the IPCA is very interesting.

This investment can be made in fixed income securities such as CDBs, CRIs, CRAs and debentures. Also, there are funds that provide greater diversification and liquidity power, in addition to having a team for selection and monitoring.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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