Brazilian increases investment in fixed income abroad, aware of exchange rate risk – 02/12/2023 – Market

In a year marked by the strong devaluation of several assets abroad, Brazilians increased investments in fixed income products abroad. At the same time, they reduced investments in variable income and withdrew funds from investment funds.

For 2023, the expectation of several institutions that offer this type of investment is an increase in the demand for diversification. In general, the recommendation is to have a percentage of the portfolio close to 10% linked to the foreign market.

This can be done through investments abroad or within the country, with or without exchange risk, depending on the product.

Data from the Central Bank show that the stock of investment in shares abroad fell by about 20%, to US$ 40 billion in 2022. The value invested in debt securities grew by almost 25%, to US$ 13.5 billion.

Last year, the dollar fell 6.5% against the real. The overseas stock index (BDRX) fell 28%. Bitcoin, 67%. Investments in interest already presented the best result in foreign currency in many years, with the US central bank raising rates to combat the highest inflation in 40 years.

Igor Rongel, head of investments at C6 Bank, says that demand on the international market has increased since interest rates in Brazil reached 2% a year. Even the increase in the basic rate to the current 13.75% per annum did not stop this movement.

According to him, there has been a new acceleration of this process since the middle of last year, more focused on fixed income products, in a scenario of high interest rates also in the US and greater supply of these products by several Brazilian institutions.

“We had a combination of three factors: an audience that had already been studying some diversification and protection in hard currency since the low interest rates, people who started to see that Brazil could have a greater fiscal risk, and expansion of the income portfolio fixed”, says Rongel.

Felipe Bottino, director of Inter Invest, says that the institution ended last year with 1 million global accounts, used for transferring values ​​and payments abroad, and 250,000 investment accounts in a partnership between the bank and the Apex platform.

According to him, there is demand from more clients for the investment product, but the institution chooses to make a selection that involves not only the size of the equity, but also the client’s knowledge of this market.

“We were surprised by a very high demand. There is a search for international diversification of investments, more in fixed income. But we draw a lot of attention from clients to exchange rate, tax and regulatory issues”, says Bottino.

“There are a series of factors that qualify a person to be suitable for this product. It is a new market, and this opening has to be done gradually.”

Currency risk is a factor that affects even assets acquired in Brazil, such as ETFs on the US Exchange or receipts from foreign companies traded on the Brazilian Exchange. These are investments that can be made in Brazil, without sending money abroad, and which are subject to the value of the asset in dollars and also to the exchange rate.

There are also products that seek to eliminate the effect of currency variation.

Sergio Rhein Schirato is a founding partner of Daemon Investments, which has a multimarket fund that operates in Brazil and invests in shares of a fund of the same institution in the USA. The national vehicle has protection against exchange variation through “hedge” operations.

“We wanted to give investors the experience of having their capital invested abroad, in global assets, but without exposing themselves to currency risk.”

Schirato states that the fund is restricted to qualified investors, those who have at least R$ 1 million in financial investments, due to exposure abroad within the maximum limit of 40% defined by the CVM (Comissão de Valores Mobiliários).

He highlights that it is a more sophisticated product and an option for this type of investor to diversify their investments.

The head of investments at C6 also claims that operating in this market requires a lot of guidance and that the bank has strengthened its advisory team. “Investors are already lost in the domestic market. In the international market, they lose more. So we work a lot with advisory services”, says Rongel.

In C6, investments abroad are made through a fund headquartered in the Bahamas, which guarantees differentiated tax treatment, with payment of tax only on the outflow of funds. Three fixed-income products are offered: the bank’s own certificates of deposit, US corporate bonds and US Treasury bills.

The minimum investment is US$ 500 (about R$ 2,500), but the recommendation is that the initial investment be around US$ 3,000 (above R$ 15,000), to offset the costs of maintaining resources of this type background. The idea is that this value represents about 10% of the client’s total investment.

For those who want to invest smaller amounts and without taking their money out of Brazil, the main options are investment funds, ETFs (Exchange Traded Fund) that follow the American S&P 500 index (IVVB and SPXI), BDRs (Brazilian Depositary Receipt) issued in Brazil that represent shares of companies abroad and COEs (Certificates of Structured Operations), investment strategy that may have gained linked to a share or index abroad.