New Articles

New Challenges for Brazilian Markets

brazilian

New Challenges for Brazilian Markets

Usually, when we talk about Latin America one of the first markets that come to mind is Brazil.

Brazil is experiencing a unique moment never experienced before in the local economy: the lowest level of interest rate and, therefore, a large demand from investors for assets that could generate a considerable performance, in the period.

Historically, the Brazilians Investor Profile has been strongly related to a conservative shape, once the Selic rate – the country’s basic interest rate – has constantly been at comfortable levels for those people who invest in conservative products, such as Savings and Certificates of Deposit, for example. Nonetheless, this perspective has been changing since the end of 2016 with the consecutive action from the ‘Comitê de Política Monetária’ (known as COPOM – very similar to the US FOMC) in reducing the interest rate, and proportionately seeking to promote the local economy. In addition, this domestic reduction is being quite influenced by the US Federal Reserve process of cutting rates.

It is possible to observe the interest yield curve below:

For this reason, financial institutions and brokerage firms are working hard on clients ‘financial education and portfolio reformulation, in order to adapt their clients’ investment portfolio to this new stage of Brazilian Market. Most analysts and advisors are aligned and agree with the Central Bank’s official reports, betting on new interest rate cuts for 2019 and, as a result, it benefits other types of asset classes, such as the Brazilian Stock Market.

Regarding that, the Ibovespa (Índice da Bolsa de Valores de São Paulo), the main indicator of the average performance from the Brazilian stock market, at the beginning of 2019 was quoted at approximately 91,000 points and until the last day of September it had an evolution of around 15% reaching its 103,600 points, with a standard deviation of, approximately, 20%. The Index has now reached record levels. Typically, with the movement of diminishing interest rates, as any other economy, there is a natural increase in demand for this type of assets, which takes a favorable and positive aspect of the segment this year, specifically given the Pension Reform approvals and lower projections for the IPCA (Índice de Preços ao Consumidor Amplo) – Brazilian official inflation index.

The latest statistic released showed 2.89% in the 12 months through September, according to IBGE – Instituto Brasileiro de Geografia e Estatística (Brazilian government statistics agency). The Central Bank’s official year-end goal for 2019 remains 4.25%, and due to this fall in inflation expectations most economists consent to another 50 basis point cut in the Selic rate at the end of this month – precisely, the next reunion will happen in 10/29/2019 and 10/30/2019.

Essentially, for the local investor, there are several alternatives to access this market, such as Equities Funds, ETFs or Active Mutual Funds. Furthermore, the whole market is gradually seeing an increase in fundraising this type of product, this is very clear if we look through the development of new asset management firms, for instance. Consequently, the biggest challenge for the investor is to adapt themselves to this relatively new type of culture in diversifying the portfolio with risky and volatile products.

portfolio

Is It Time To Play Defense with Your Investment Portfolio?

The bull market has been charging ahead for more than a decade now, but financial professionals are starting to wonder whether the good times are about to come crashing down on the American public’s prosperous portfolios.

That means it could be time to become a bit more defensive with your investments, says Dr. Joseph Belmonte, an investment strategist and author of Buffett and Beyond: Uncovering the Secret Ratio for Superior Stock Selection(www.buffettandbeyond.com).

“People will talk about having good luck or bad luck in the market, and you never want to depend on blind luck,” says Dr. Belmonte says. “But another definition of luck is when opportunity meets preparation. And if a recession is coming, as so many people fear, then you want to make preparations.”

One suggestion for doing that, he says: Stay away from cyclical stocks, which are stocks that perform well when the economy is humming along, but struggle when things turn sour. These are companies that provide something that’s not essential to daily living or that consumers can at least postpone purchasing when times are tough.

Examples are car manufacturers, higher-end retail stores, and mortgage companies. Specific examples are Ford, General Motors, Caterpillar and Macy’s.

With the potential for a recession looming, Dr. Belmonte says, it’s vital that you review your portfolio, examine whether you have cyclical or non-cyclical stocks, and decide whether you need to make adjustments.

He says a few things worth remembering as you shift your portfolio to the defensive mode include:

-Look for efficiency. The companies you seek for your portfolio should be efficient. “They must have a relatively high return on equity and a consistent return on equity,” Dr. Belmonte says. “If the ROE is high and consistent, we know the firm has the capacity to create value because it is already doing so.”

-Examine a company’s history. Dr. Belmonte says that Warren Buffett likes to look at a company’s average return on equity over a 10-year period, most likely because over any 10-year period the economy goes through recessions and also economic expansions. “As the economy goes through these cycles, expectations about a company’s future will rise and fall with the mood of all of us,” Dr. Belmonte says. “Buffett probably feels that over a 10-year period, we see the average of at least one complete economic cycle, and of course, the ensuing mood swings that accompany both the good and bad times.”

-Consider value. Price follows value, Dr. Belmonte says, so invest in stocks that increase their value “every minute of every day.” He says McDonald’s is one example. The stock’s price may drop in tough times, but eventually the price catches back up to the company’s overall value. To find such companies, he says, look at how a stock performed during the last recession from June 30, 2008, to March 30, 2009. Value-added stocks didn’t fall as far as the overall market, and recovered much more quickly.

-Focus on businesses you understand. A company might sound good in theory, but if you don’t really have a good grasp of what it does and how the market for it might develop over the long haul, then it could be a risk for you. Dr. Belmonte suggests looking at businesses you have a good understanding of, so you can make an educated guess of where they likely are headed. “If you take a business you understand, and that company has a high and relatively consistent ROE, you are probably looking at a pretty good contender for your stock portfolio,” he says.”

“I always tell people to remember the good, the bad and the ugly,” Dr. Belmonte says. “The good stocks should be in our portfolios; the bad stocks should be in someone else’s portfolios; and the ugly stocks should be in nobody’s portfolio.”

 

 

Dr. Joseph Belmonte, author of Buffett and Beyond: Uncovering the Secret Ratio for Superior Stock Selection (www.buffettandbeyond.com), is an investment strategist and stock market consultant. He is fond of saying, “If you want to live on the beach like Jimmy Buffett, you’ve got to learn how to invest like Warren Buffett.” Dr. Belmonte has developed hedged growth income strategies for family offices, and has lectured to numerous professional and investment groups throughout the country. His weekly video newsletter is sent to thousands of investors, money managers, and academics both nationally and internationally.