What is the biggest risk in investments for 2024 – 12/23/2023 – From Grão to Grão

The process of building an investment portfolio involves estimating scenarios and assigning probabilities. These scenarios not only involve positive returns, but also risks, that is, those scenarios that provide lower or negative returns. Although it is not possible to prevent all investment risks, it is very important to map out some probabilities to prevent “known surprises”.

Going back to the end of 2022, the biggest risks for 2023 were a more abrupt economic slowdown not only in Brazil, but mainly in the USA. Also, it was imagined that global inflation would be higher and would decline very slowly.

The consequences for this would be higher interest rates in the USA, lower stock prices and a more devalued Real/Dollar exchange rate.

These risks did not materialize. However, this does not mean that 2023 was peaceful. Proof of this is that multimarket funds, managed by the most renowned financial market specialists, had the second worst year in the last 15 years.

Almost 80% of the appreciation of the Ibovespa occurred in the last two months. In other words, only those who endured 10 months of suffering throughout the year were rewarded.

It was a year with a lot of volatility, that is, with many changes in economic variables and expectations.

In the Brazilian case, in particular, it was a year with a change of government that generated a lot of uncertainty. Many were worried about market prices under the new government.

Many still remain fearful or just hope it goes wrong. Be careful not to invest using your “liver” and be just another fan. As Nelson Rodrigues said: “The majority is rooting for the tightrope walker to fall.” This year, the new government behaved like Nelson Rodrigues’ tightrope walker. It is necessary to look at the economic fundamentals.

Although there is still an expectation of a global slowdown and in Brazil, this risk appears to be well adjusted to market prices. Inflation, which seemed out of control in the USA, is now on the right path. Not only there, but here in Brazil. I remember that in 2023 it was even considered changing the inflation target here in Brazil. But, that is already a thing of the past.

Central Banks around the world have already aimed their interest rate cannons downwards. Fighting against the monetary authorities that have the greatest firepower is not usually profitable.

Yes, there are still risks. However, the scenario ahead appears more benign.

In this sense, one of the biggest risks, at this moment, is maintaining an investment portfolio primarily referenced to the CDI.

Those who think that investing internationally can be a protection may again be frustrated by exchange rate movements.

The Brazilian trade balance has surprised positively and everything indicates that it will surprise even more in the coming years. This could lead to a stronger Real.

This risk is most significant for those who invest in international fixed income. The 6% interest rate per year on bonds abroad could be lost again with the appreciation of the Real, resulting in another year of zero or negative returns.

It seems contradictory, but given such low expectations and such conservative investor allocation, the biggest risk today may be that nothing significant goes wrong.

If this occurs, interest rates in Brazil and the USA could reach 8% and 4% per year, respectively, by the end of 2024, the exchange rate could fall to R$5.6/dollar and Brazilian GDP could grow by more than 2 %. This is not the base scenario, but a risk that you should not ignore, as it could favor the stock market and, mainly, investments in long-term interest rates in Brazil.

So be careful when betting against. If you want to protect yourself, take the opportunity to lock in the higher interest rates on bonds referenced to the IPCA and prefixed on private bonds in Brazil. This should be the best balance of return per risk for the coming years, because if everything goes right, interest rates will fall and if everything goes wrong, they will fall even faster.

I would like to take this opportunity to wish all readers a Merry Christmas, full of joy and gratitude.

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

Speak directly to me via email.

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