Opinion – From Grain to Grain: With our interest rates, find out if it pays to invest in dollars

When there is a change of government, usually, many are afraid of changes and look for investment alternatives in the international market. Today, this movement gains additional appeal. International interest rates have risen since last year. However, is it worth it? I discuss the main reasons that lead investors to seek international investments and what seems more conservative at the moment.

Talking to many investors, I find that there are three common reasons for wanting to invest internationally:
1 – Protection;
2 – Diversification;
3 – Exposure.

Let’s discuss each of these arguments to understand whether international allocation makes sense now.

Currency is a very volatile instrument. To give you an idea, its volatility is similar to that of the Ibovespa.

Therefore, for those seeking protection, understand that this exposure can bring large losses in your income in the short term.

The diversification argument may be coherent, but for that to happen, it is essential to have a diversified portfolio of risky assets.

For example, it is reasonable to have dollar exposure for someone who invests in the Brazilian stock exchange. Usually, these two investments have opposite oscillations in the short term. Thus, having both assets reduces portfolio oscillation.

And for those who want to have foreign exchange exposure?

In carrying out any investment, the starting point, as I have discussed in previous articles, is the definition of a scenario.

It is precisely at this starting point that the vast majority fails or demonstrates inconsistency between their expectations and preferences. Many of those who wish to have exposure to a dollar security do not expect a relevant devaluation of the Real or do not know what to expect from the variation.

The investor who wants to have exposure, more than others, must necessarily have a scenario of how much exchange rate devaluation is expected. Otherwise, your desire resembles a whim like buying a new piece of clothing or cell phone.

The definition of a scenario is extremely important so that the return that could be obtained with more conservative alternatives can be compared.

For example, it is currently possible to invest in CDBs, guaranteed by the FGC, yielding IPCA + 7% per year for a period of 5 years.

Fixed income securities of international companies (bonds) with high credit quality are yielding close to 5.5% per year in dollars for the same term.

Thus, it would be necessary to make a projection for the IPCA and for the dollar in the next 5 years to carry out the comparison. At least for the next 12 months.

According to the Central Bank’s Focus report, the market expects the IPCA and the dollar to increase by 5.74% and 0.6%, respectively, in 2023.

If these expectations are correct, your investment in CDB will yield 13.1% in 2023, while the investment in bonds should be appreciating only 6.1% in the same period.

If you don’t have a forecast of what should happen, you can look to the past as an alternative for comparison.

The figure above shows the evolution of an investment of BRL 100,000 yielding IPCA + 7% per year (on the blue line) and another yielding the Dollar + 5.5% per year (on the red line) from 1999 to January 2023.

Those who invested BRL 100,000 in CDB in 1999, with a return of IPCA + 7% per year, had BRL 2.08 million in January 2023. bonds the Dollar + 5.5% per year, ended the period with just the equivalent of R$ 1.03 million.

Therefore, the international fixed income investment appreciated less than half of the investment in CDB. Additionally, it should be considered that the CDB, guaranteed by the FGC, has less risk than bondseven if this is from a high credit quality company.

Even an investment in the CDI, in this period, appreciated more than bonds in dollars as shown in the figure above.

Therefore, at this time of high interest rates in Brazil, the best protection and exposure is to take advantage of these rates with less risk. For those who wish to protect their purchasing power, investing in securities linked to the IPCA brings more security and profitability.

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

Talk directly to me via email.

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