Investors in IPCA-referenced securities are already feeling the effect of the deflation observed in July. This effect confuses the investor who sees his fixed-income security having a negative result, while interest rates are high. I explain this effect and what to do.
The IPCA is the price index, calculated by the IBGE, which measures official inflation in Brazil and updates most fixed-income securities.
Usually, we only see this index going up and many times above what we expect. But, it also drops in a few months.
Since 1998, that is, in 282 months, the prices of goods and services have dropped in 9 months. Yes, these moves are rare. Occurred in only 3% of the months in the last 24 years.
Usually, the decline occurs either due to an economic slowdown or a supply shock. However, this is not the case.
The drop in the IPCA at this moment is caused by a one-off effect of tax reduction, specifically, the ICMS.
According to Anbima’s estimate, the IPCA for the month of July, to be released next week, should be -0.66%.
Although this number is still an expectation, the financial market agrees to update fixed income securities by this projection, until the actual number is released.
When we invest in an IPCA-referenced security, the objective is to protect against inflation. It is certain that inflation will be positive this year and beyond. Therefore, at times like this it is important to have a long-term view so as not to make mistakes.
The effect of the fall in the IPCA will be concentrated in the months of July and August. Soon after, inflation should pick up.
On average over the last 15 years, a security that yields IPCA + 3% per year has beaten CDI and Selic. In the same period, in just three years, a security that yields IPCA + 5.5% per year lost the CDI in the specific year.
IPCA-referenced securities are like insurance for your portfolio. They guarantee the long-term purchasing power of the portfolio. Thus, some participation in them is always relevant in a portfolio with a horizon of more than two years.
Therefore, be careful not to make investment decisions looking only at the short term, when your horizon is long.
Michael Viriato is an investment advisor and founding partner of Investor’s House
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I have over 8 years of experience in the news industry. I have worked for various news websites and have also written for a few news agencies. I mostly cover healthcare news, but I am also interested in other topics such as politics, business, and entertainment. In my free time, I enjoy writing fiction and spending time with my family and friends.
