Brazilians despise this currency that has greater potential and advantages than the dollar – 07/08/2023 – From Grain to Grain

When we think of protecting our financial assets, we usually think of dollar investments. Some send funds abroad and invest in fixed income in dollars. At this point, they stop comparing this investment with the CDI. However, there is another currency that has much more advantages than the dollar, which really protects your equity, but which is being despised right now.

Investing in dollars in the long term is usually positive. However, there is another currency that has greater advantages than the dollar. The advantages of this other currency are:
1 – Lower volatility than the dollar. So you experience less wobble;
2 – Higher interest rate on fixed income;
3 – There was never a year in which it suffered devaluation, unlike the dollar that fell in the last two years;
4 – Possibility of investing with exemption from IR;
5 – Easier negotiation;
6 – Greater simplicity in succession than international investments;
7 – In the long term, the variation of this currency, added to its interest rate, always beat the CDI.
8 – Protects Brazilians from their greatest risk.

With all these advantages, you can imagine that everyone should prefer it to the dollar and even withdraw their funds invested in products referenced to the CDI or dollar to invest in it.

See below the graph of the evolution of the simple investment in this currency in blue and the dollar in the orange line. Notice how stable this coin is. This variation in the graph does not include any interest rate, but only currency variations.

The currency I am referring to in the blue line on the graph and which has the advantages mentioned above is the IPCA.

The Extended Consumer Price Index (IPCA) can be considered a currency. Not a currency you make payments on, but one you can invest in fixed-income assets pegged to.

Over the last 28 years, that is, since the beginning of the Real plan, the IPCA has appreciated an average of 6.76% per year while the dollar has appreciated 6.36% per year.

However, the return volatility of the IPCA was 1.6% per year and that of the dollar is 20.2% per year. Therefore, a lot of oscillation is to be expected when investing in dollars.

Remember that it’s precisely when the dollar drops that you want to buy? The same should happen with the IPCA. The latter does not usually fall, but it goes through moments of minor highs. It’s these moments, like now, that you must seize.

Investment in IPCA has two major advantages at this time. First, inflation dropped a lot and we know that structurally Brazil has problems with inflation. She should soon resume. Mainly, because the current government has already defined itself as a little more spender.

Second, real interest rates are still at an attractive level in the long term.

Yes, I know that in the short term these applications are losing to the CDI and that this causes discomfort. But, don’t let this myopic view get in the way of making bigger gains in the long run.

In the last 14 years, the Selic and the CDI had a gain above the IPCA of only 3.58% per year. Therefore, if you invested in IPCA-linked securities, since 2010 you have earned well above the CDI.

IPCA application	Return in % of CDI
IPCA+4.5% per year	133.0% of CDI
IPCA+5.0% pa	144.9% of the CDI
IPCA+5.5% pa	157.5% of the CDI
IPCA+6.0% pa	170.9% of the CDI
IPCA+6.5% pa	185.0% of the CDI
IPCA+7.0% pa	200.1% of the CDI
IPCA+8.0% pa	232.9% of CDI
IPCA+9.0% pa	269.9% of CDI

The table above shows how much you’ve earned as a percentage of the CDI since 2010, investing in each rate referenced to the IPCA. For example, if you invested in an asset yielding IPCA+5.5% per year, you would earn 157.5% of the CDI in the period.

The big problem is that usually when it is the best time to invest in securities linked to the IPCA, they are momentarily losing the CDI. Like now.

However, you are now able to invest in CDBs with yields of IPCA+6.5% per year with maturities of up to 6 years and you have private securities, exempt from IR, with returns of IPCA+6.0% to 7.5% per year with maturities of up to 15 years and with high credit quality.

An exempt title yielding IPCA+6.5% per year is equivalent to a taxed title yielding more than IPCA+8.5% per year.

These yields should provide a much higher long-term return. Thus, hold the discomfort for a while longer.

Put aside the fact that the CDI is now higher, as it is fleeting and when it drops, you will no longer have the opportunity now.

Protect your portfolio in the long term by taking advantage of IPCA-linked investments now. Have the same behavior as those who invest in dollars, that is, understand that you invested in another currency and do not compare it with the CDI.

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

Talk directly to me via email.

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