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How Millennials Are Changing The Investment Game

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How Millennials Are Changing The Investment Game

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Millennials are on the verge of becoming big players in the investment field.

Baby boomers, according to Forbes, are about to pass an estimated $30 trillion in assets down to millennials within the next few years. This generational transfer of wealth gives millennials many options on investing — starting with the investment firms they choose.

Understanding millennials’ mindset on investing and, just as importantly, learning their personality traits, preferences and dislikes, are crucial to any investment firm seeking to help them allocate their assets. For starters, millennials’ approach to investing is distinct to previous generations, and they handle money and choose the people who they entrust with that money very differently, too.

Those factors will have several ramifications for how assets are allocated in the next three, five, 10, 20, and 30 years. That’s why discovering how to connect with millennials so that they feel confident enough to trust you with their funds is critical.

How do millennials differ from previous generations, including their investment approach? Here are some revealing distinctions:

They’re more entrepreneurial. Whereas their parents, baby boomers, valued job stability and scaling the corporate ladder, millennials are more inclined to build their own businesses and take greater financial risks. They’re confident that even if they lose some money, they can earn it back — facts firms should consider as they approach this generation and brainstorm investment solutions.

They’re wary of Wall Street. After the Great Recession, many millennials were forced to take on student loans because their parents couldn’t afford college tuitions. So if they’re not entirely warm to the idea of Wall Street, what do millennials trust? Where do they see themselves putting the $30 trillion they’ll one day inherit? This group of investors favors commodities and options and they’re also more likely to put money in exchange-traded funds than their baby boomer parents.

They’re impassioned about helping the world. Millennials want to serve a greater purpose to humanity. This common trait has given rise to the concept of “impact investing” — intentionally putting money in companies or organizations that offer a financial return but also contribute funds toward creating a positive social or environmental impact.

They often don’t trust advisors. According to a study, 57 percent of millennials don’t trust advisors, believing they’re in it more for self-serving purposes than for their clients’ best interests. What they want is someone who wants to build a relationship with them and works toward gaining their trust.

So knowing how millennials and their investment thoughts are unique, how should investment firms navigate this young crowd of investors and best position themselves to reap the business of this generation, both today and in the coming years? 

Create trust and be transparent. Investment firms can build a foundation to better serve the millennial generation by fostering relationships, customizing your advice, and being clear about fees. For example, millennials, unlike baby boomers, prefer flat fees over commission-based pay models; that’s what they’re most familiar with through the advents of Uber and Netflix.

Explore technology. Millennials like technology but they also like simplicity and convenience. Look for ways to leverage technology to make experiences simpler, more self-serving, and more convenient for millennial users. Robo-advisors and digital investment content platforms and tools are just the start of the options available to explore. If they find it inconvenient or complicated to do business with you, they’ll do it with someone else.

Be a great communicator. While technology and self-service drive them, millennials also appreciate a human touch in the investment space, meaning a hybrid of tech and human would be the ideal mix for them. Find out how your millennial client likes to communicate — by text, email, messaging via a digital investment content platform, or on the phone. And when you are communicating, remember to be an advisor, not a dictator. Millennials appreciate insight, but they still like to be the one controlling decisions that impact them.

Use data to customize recommendations. Track clients’ online activity to gather data about them and use this in conjunction with their personal preferences to send them customized investment ideas, alerts, and recommended products.

It comes down to this: Millennials and baby boomers are as different as rotary phones and text messages, and newspapers and podcasts. And they’re just as varied in their viewpoints of success and allocation of material wealth.

Therefore, if advisors truly want to stay relevant in the investment game, they’ll have to work hard to build rapport with this generation and show good will to retain them as clients both currently and into the future.

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Gui Costin (www.guicostin.com), author of the No. 1 Bestseller Millennials Are Not Aliens, is an entrepreneur, and founder of Dakota, a company that sells and markets institutional investment strategies. Dakota is also the creator of two software products: Draft, a database that contains a highly curated group of qualified institutional investors; and Stage, a content platform built for institutional due diligence analysts where they can learn an in-depth amount about a variety of investment strategies without having to initially talk to someone. Dakota’s mission is to level the playing field for boutique investment managers so they can compete with bigger, more well-resourced investment firms.

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Archives, Global Trade Daily, Special Reports

New Challenges for Brazilian Markets

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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.

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Archives, Global Trade Daily, International Trade

Why Brazil Could Be the U.S.’s Next Great Trade Partner

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The U.S. and Brazil are the largest economies in the Americas, and all signs point to an even more active relationship between the two powerhouses in the future. Just this year it was confirmed that U.S. citizens would no longer need a visa to travel to Brazil and can remain in the country for at least 90 days, allowing for more frequent interactions at a very basic level. Since that announcement, Brazil has seen increased travel interest from American tourists, with searches for flights from the U.S. to Brazil up more than 30 percent in March alone, compared to the previous year. 

While tourism is a great way to build strong country relationships, what’s even more significant is a recent report that shows investment interactions between the U.S. and Brazil increased – and improved – between 2008 and 2017. More specifically, the report highlighted growth and opportunity across three of the most powerful indicators of economic health between 2008 and 2017: direct investments, exportation and employment. 

Consider that by the end of 2017, U.S. investments into the Brazilian economy reached a whopping $68 billion, comprising nearly 3.3 percent of Brazil’s overall gross domestic product (GDP) – according to the report. For its part, Brazil’s foreign direct investments into the U.S. surged dramatically (356.5 percent) over the last decade, reaching over $42 billion in 2017. What’s more, from an exportation standpoint, the U.S. is a key destination for Brazilian exports. In fact, in 2017 alone, Brazil exported goods worth over $27 billion to the U.S. Similarly, the U.S. was the second main source of imports to Brazil in 2017. 

Naturally, prolific trade and investment between the two countries is already leading to job creation in both countries. U.S.-controlled multinational companies employed nearly 655,000 Brazilians in 2015 and generated 131,900 new jobs in Brazil between 2009 and 2015. On the other hand, Brazilian companies in the U.S. employed over 74,000 Americans in 2015. Further, for Brazil, increasing trade with the U.S. also eases the country’s access to other international markets, boosting Brazil’s clout internationally while also broadening the job market and improving the Brazilian economy. In turn, increased trade with Brazil offers the U.S. access to resources that are critical to the American economy, such as oil and gas, mining, and chemicals. 

As these initial results suggest, the opportunities on the horizon for a mutually beneficial relationship between the two countries are seemingly limitless. Currently, the U.S. is investing heavily in sectors across the Brazilian economy, focusing especially on mining, finance and insurance – and the U.S. is also especially well positioned to take advantage of unprecedented access and opportunity in one particular sector: oil. In light of that fact that the global demand for oil is rising, potentially reaching 102.3 million barrels per day by 2022, the Brazilian oil and gas industry presents the next great investment opportunity for foreign investors, especially those from the U.S. 

Indeed, Brazil’s oil reserves are enormous – the 15th largest in the world, with over 15 billion barrels – and are located mostly offshore in deep waters. Brazilian oil companies are already pushing the boundaries of innovation when it comes to deep water exploration. Petrobras, for example, discovered pre-salt oil reserves – which are entirely unique to Brazil – off the coast of Rio de Janeiro in the Santos Basin in 2006. This initial discovery led the company to find a series of even larger oil reserves containing potentially billions of barrels of light oil. As oil experts will know, pre-salt extraction is more painstaking and complicated than other forms of oil and gas removal. However, investing in exploration and production in the pre-salt regions is becoming absolutely critical as the world’s post-salt reserves dwindle. Since discovering these reserves, Petrobras has actually developed many of the technologies needed to overcome harsh oceanographic conditions and create production infrastructure. 

Of course, breaking into a new foreign market is always daunting. To entice foreign investors who are best equipped to efficiently and responsibly drill at these pre-salt reserves, Brazil’s National Petroleum Agency is organizing seven auctions (also known as “bidding rounds”) between 2019 and 2021, during which they’ll auction off areas containing billions of barrels of oil. These bidding rounds are designed to formally and transparently assign blocks from the pre-salt reserves that Petrobras currently has ownership over. During an upcoming bidding round on November 6, for instance, the Brazilian government will auction off the rights to extract the excess of 15 barrels of oil from across four fields called Atapu, Buzios and Itapu e Sépia. The winners will be able to utilize Petrobras’ technical data for pre-salt exploration and extraction in return for reimbursing Petrobras for a portion of its investment costs.

Encouraging bilateral trade and investment between Brazil and the United States is already leading to economic growth for both countries, and – as the data from recent years shows – the opportunities for future mutual prosperity are endless. By continuing to create unique investment opportunities, such as those offered to foreign investors during the upcoming oil auctions, Brazil will be able to court U.S. investors and further solidify its standing as America’s next great international trade partner. 

To consult the schedule of bids and more information, please, refer to: http://rodadas.anp.gov.br/en/

 

Sergio Ricardo Segovia Barbosa, 55, is a retired Rear Admiral in Brazilian Navy. With recognized professional experience in military, managerial and governmental areas, he has worked in Intelligence Analysis, Military Operations, and Logistics. He also worked in Emergency and Risk Management, Maritime Safety, Strategic Planning, Navigation and Maritime Operations. In addition, in the foreign trade area, he was responsible for logistics and international acquisition processes, when he was in charge of the group for ship receiving abroad.

Mr. Segovia has a postgraduate degree in Politics and Strategy from the War College. He is fluent in English and Spanish.

Archives, Global Trade Daily, Special Reports

COMING AND GOING, THE U.S. WINS FROM FOREIGN DIRECT INVESTMENT

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Think of it as strength through diversification

Foreign direct investment (FDI) is a vehicle for gaining entry into growth markets. Companies might decide the best approach is to acquire products and technologies already in the target market, or to secure distribution and retail channels for their existing products, or they might decide to launch greenfield production to serve the local or regional markets, or some combination. Whatever their approach, their goal is to generate additional sales. Investors reward companies that diversify their sales and income. Multinational companies typically look to grow global market share, not just shift market presence.

For the host economy, FDI often brings new well-paying jobs, an expanded tax base (if they don’t offset with too generous a tax holiday), stronger productive capacity, transfer of technological expertise, improvements in infrastructure, and stronger economic growth. In theory and in general, it’s a win-win. In practice and locally, it will depend on each deal.

Companies are not multinational, they are “multi-local”

A.T. Kearney produces an annual Foreign Direct Investment Confidence Index that surveys investor intentions. More than 75 percent of companies say they invest to be close to market, putting them in a better position to cater to local culture and customs, navigate the idiosyncrasies of the local business environment, and embed themselves in the community as a local partner with deeper roots beyond their core business.

Large cities and megacities are the most popular destinations for FDI – nearly two-thirds of the companies surveyed have more than half their FDI in cities, attracted by the concentration of talent, clusters of R&D or related activities, and availability of infrastructure. Fifty-nine percent of respondents said their companies begin their FDI assessments at the regional or city level, rather than take into account national considerations.

Many large cities have built their economic reputations on particular sectors. For example, an information technology investor looking at Asia would identify Hyderabad or Bangalore in India as among their top targets. Companies looking to locate an overseas headquarters in cities with strength in business services might look to Singapore, Hong Kong or Dubai first.

States and cities compete for foreign direct investment – why?

Countries, states and localities compete for capital by offering streamlined administrative procedures, incentives like tax breaks and grants, and by establishing special economic and free trade zones. Many U.S. states have permanent investment promotion offices overseas. South Carolina has offices in Shanghai, Tokyo and Munich. Florida maintains offices in 13 countries.

U.S. states and cities work hard to attract foreign investors because of the benefits they bring to local economies. The U.S. affiliates of majority-foreign owned firms employed more than seven million American workers in 2016, invested $60.1 billion in U.S.-based research and development, and contributed $370 billion to U.S. exports.

According to OFII, the trade association that represents foreign investors in the United States, international companies employ 20 percent of America’s manufacturing workforce and 62 percent of the manufacturing jobs created in the past five years can be attributed to international companies investing in the United States.

foreign direct investment FDI employment revenue

What goes out also comes in – how the U.S. wins with overseas FDI

There are two sides to the FDI coin, and the U.S. economy is positioned to win whether the FDI is coming or going.

A common perception exists that American companies who invest overseas are sell-outs, moving jobs in search of lower wages, and that the host country is the only beneficiary.

Politicians stoke this fear. The rhetoric will only heat up in the run up to the 2020 presidential election, but the data tell a surprising and different story.

In fact, economists Oldenski and Moran, who are leaders in studying FDI, have found that increased offshoring of manufacturing by U.S. multinationals is actually associated with increases in the size and strength of the manufacturing sector in the United States.

More specifically, they found that when a U.S. firm increases employment at its foreign affiliate by 10 percent, employment by that same firm in the United States goes up by an average of four percent, capital expenditures and exports from the United States by that firm also increase by about four percent, and R&D spending increases by 5.4 percent.

The idea that outward FDI is associated with expansion of economic activity at home feels counterintuitive, and critics would rightly point out that the overall result for the U.S. economy doesn’t mean there isn’t labor dislocation of some kind.

Demand for certain types of production occupations might increase (e.g., engineering or sales) at the expense of workers with skills that are less or no longer in demand. Or, some local labor markets might be adversely affected despite overall gains, or some manufacturing subsectors may wane as others rise.

But on balance, across the U.S. economy, Oldenski and Moran conclude that the foreign operations of multinational firms tend to be complements, not substitutes for domestic U.S. operations.

Myth busting on foreign direct investment

Global FDI flows are waning

Globally, companies are engaging in less FDI. For the third year in a row, global FDI flows have fallen. In 2018, FDI flows dropped 19 percent from to $1.47 trillion to $1.2 trillion.

Developed country recipients saw the biggest hit with a 37 percent decline. Part of the explanation is fewer megadeals and corporate restructurings – the large value of those in previous years inflated the overall value of FDI flows.

Tax reform in the United States has also set in motion a shift in FDI flows. Most outward FDI from U.S. companies is in the form of more than $3.2 trillion in retained earnings held overseas. Changes to the U.S. corporate tax regime prompted a 78 percent increase at the end of 2017 in companies reinvesting overseas earnings in the United States. The inward investment took the biggest bite from FDI into the European Union.

Another major factor was China’s FDI outflows which reversed for the first time since 2003, declining 36 percent largely in response to the government’s restrictions on capital outflows directed to investments in assets such as real estate, hotels and entertainment facilities.

Wait and see?

According to A.T. Kearney’s annual Foreign Direct Investment Confidence Index, 77 percent of responding companies said FDI will be more important for corporate profitability in coming years and 79 percent said they intend to increase FDI over the next three years, pending their assessments of the availability of quality targets, the macroeconomic environment, and their availability of funds.

But in reality, multinationals may be taking a wait and watch stance as trade tensions between the United States and China escalate. At the same time, a number of countries have implemented tighter screening of proposed investments, citing national security concerns associated with foreign ownership of strategic technologies and other assets. Overall, the investment policy climate is becoming less, not more, favorable with greater restrictions and regulations than liberalization.

Investor confidence in the United States is still strong

On A.T. Kearney’s index, developed markets dominate 22 of the top 25 spots on the list of countries considered the top targets by corporate investors. Despite trade tensions and risks of economic downturn, these economies offer relatively stable regulatory environments, legal protections, skilled workers and the availability of technological and innovation capabilities, all qualities multinational companies seek in FDI targets. Size and market potential matter too. China, India and Mexico are emerging markets where multinationals must be players to be globally competitive.

For the seventh year running, the United States tops the index as the most attractive target for FDI. FDI inflows to the United States fell 18 percent in 2018, part of a broader decline in FDI flows to developed markets and fewer large mergers and acquisitions, but the United States still receives more FDI than any other country.

China, which held the top spot from 2002 to 2012, dropped to seventh. European countries hold 14 of the top 25 spots. The only emerging markets on this year’s list were China, India, Taiwan and Mexico. Singapore holds the 10th position and South Korea the 17th spot. Notably, the United Kingdom is holding steady in fourth place, despite the uncertainties surrounding Brexit.

The transition from physical to digital

FDI accounts for 39 percent of capital flows for developing countries as a group and around one-quarter for the least developed countries. FDI is less volatile than liquid financial assets and more resilient during global economic and financial downturns.

Unfortunately for developing countries particularly outside Asia, there’s not only less foreign direct investment to go around, the type of FDI is slowing changing too. As digital technologies become more diffuse, companies are shifting to “asset light” forms of international production. In more cases, companies no longer need the same level of physical production assets or employees overseas to achieve growth. The drop in the value of announced greenfield investments may be a sign that growth in global value chains is stagnating.

A more nuanced conversation in U.S. politics

Global FDI flows are critical for growth in developing and developed markets alike, including the United States. Multinationals are stronger in their home economies when they diversify, and we should seek to have a more nuanced conversation about the role of FDI in the U.S. economy – including its impact on job creation and job shifting – rather than simply demagoguing the companies who invest overseas or the foreign companies who invest here. An evidence-based and comprehensive policy dialogue would better serve American workers in the long run.

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Key resources:

  • To keep track of global FDI flows, consult UNCTAD’s annual reports which include statistics and analysis of investment policy trends. Access the 2018 Global Investment Report here.
  • Economists Theodore Moran and Lindsay Oldenski debunk some prevailing myths about the strength of the U.S. manufacturing base and the role of FDI in an excellent policy brief found here.

 

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Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fourteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

This article originally appeared on TradeVistas.org. Republished with permission.

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Archives, Global Trade Daily, Special Reports

Is It Time To Play Defense with Your Investment Portfolio?

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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.

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Archives, Global Trade Daily, In The News

Long-Awaited Brazilian Pension Reform Reopens Doors for US Investors Ahead of US Secretary Wilbur Ross’s Trip to Brazil

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Nearly two weeks ago, Brazil’s House of Representatives approved, in a first round of voting, a long-debated reform of the country’s convoluted pension system. For the millions of Brazilians following the Reforma da Previdência (Pension Reform), this first round of approvals is a positive step forward and one that ensures a reasonable forecast for the estimated economic impact this will have on Brazil over the next decade.

But Brazilians are not the only ones who should celebrate the outcomes of this first round of voting. For US investors, the House’s approval of Brazil’s pension reform is a green light for far greater opportunities to come. Ahead of US Secretary of Commerce Wilbur Ross’s trip to Brazil in the coming week, this move will also help the US evaluate how domestic reforms in Brazil can facilitate US-Brazil bilateral commercial engagement.

The Pension Reform, as it stands, is expected to help revamp Brazil’s costly pension system, bolster Brazilian public finances and bring budget numbers down to a sustainable level within the next years. More importantly, it will be a trigger for much-needed tax reform. Implementation of both pension and tax reforms would be a real turning point for the country’s economy.

Though Brazilians and investors are right to celebrate this progress, a number of additional hurdles lie ahead for the Reforma da Previdência before it is approved. Over the coming weeks, the reform will have to pass through a vote by the Special Committee, a second round of approvals by the House, and two rounds of approvals by the Brazilian Senate.

Nevertheless, for President Jair Bolsonaro’s economic team, headed by economist Paulo Guedes, this is a victory. Since Bolsonaro’s visit to Washington in March 2019, companies interested in investing in Brazil have kept their eyes peeled for concrete outcomes from Brazil’s new administration. This is one such outcome.

Does the Pension Reform solve all of Brazil’s problems? Far from it. The text itself is not perfect and can be (in fact has been) criticized, especially as it pertains to the benefits provided for different categories of workers. But despite its imperfections, foreign investors can take this step forward as a sign that the Brazilian government is committed to making difficult decisions to improve its economic circumstances. There is now an opportunity for Brazil to embark on a growth cycle.

Relying on the assumption that the reform will pass, the Brazilian real has strengthened in the past weeks. This will foster investments in the middle to long term. In addition, it is important to note the government has encouraged the expansion of actions related to the Investment Partnership Program (PPI) in an effort to create a more business friendly and less bureaucratic environment for foreign investors in several sectors of the economy.

Over the long term, in addition to opening a door to other relevant and necessary legislative changes, the approval of the Pension Reform shows Brazil’s commitment to implementing broader necessary reforms, a positive sign to the members of the Organization for Economic Cooperation and Development (OECD) currently evaluating Brazil’s request for accession.

Along with the excitement around the approval of the pension reform text in the past weeks, Brazil can count on another recent victory: the signing of the Mercosur-European Union Agreement. After twenty years of negotiations, under the leadership of Mauricio Macri and Jair Bolsonaro Mercosur reached a final and comprehensive trade agreement with the European Union on June 28, sending a message to the world that Mercosur’s member countries are committed to the multilateral trading system and are looking to expand their trade relationships.

Today’s Brazil is open to investments and to competition; the US private sector should rejoice in these changes. The Brazilian House’s approval of the Pension Reform is at the heart of changes deemed necessary to reduce red tape and improve business performance in Brazil. As President Bolsonaro marks 200 days in office, investors should be ready to once again seize on the opportunities Latin America’s largest economy has to offer.

 

Renata Vargas Amaral is a Visiting Scholar in the Trade, Investment and Development Program at the Washington College of Law at American University. She is the founder of Women Inside Trade.

 Roberta Braga is an Associate Director at the Adrienne Arsht Latin America Center of the Atlantic Council

 With Valentina Sader, Program Assistant at the Adrienne Arsht Latin America Center of the Atlantic Council

Archives, Commentary, Global Trade Daily

If The Bull Market Turns Bear, Is Your Portfolio On The Right Cycle?

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The current bull market – at 10 years and counting – is the longest in the nation’s history. But instead of celebrating that longevity, plenty of people are worried about how much longer the good times can last, and whether we could be headed for a recession.

What does that mean for investors fretting that the next bear market will devastate their investment portfolios?

For one thing, those investors might want to ask themselves whether the stocks they are invested in are cyclical or non-cyclical, says Dr. Joseph Belmonte, an investment strategist and author of Buffett and Beyond: Uncovering the Secret Ratio for Superior Stock Selection (www.buffettandbeyond.com).

The answer could be critical, he says, because cyclical stocks perform well when the economy is humming along, but struggle when things turn sour. That’s largely because cyclical stocks are companies that provide something that’s not essential to daily living or that consumers can at least postpone purchasing.  

“Sometimes a cyclical stock will begin to decline nine months before the market begins to weaken because of a pending recession,” Dr. Belmonte says.

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

Non-cyclical stocks, on the other hand, are the stores or companies people flock to for bargains when times grow tough. Some of these stocks are Dollar Tree, Costco and Ross Stores.

But for investors, just knowing the answer to the cyclical, non-cyclical question is not enough, Dr. Belmonte says. They still need to review a company’s numbers.

“If properly used, the numbers will tell us almost everything we need to know about a company,” he says. “If we use the correct numbers in the correct way, the bottom-line results will tell us which companies we want in our portfolio.”

The problem, Dr. Belmonte says, is that most analysts and investors use the wrong numbers when trying to decide whether a stock is a good or not-so-good option.

A comparable method of measuring the efficiency of a company’s operations. That’s why Dr. Belmonte is a proponent of what’s known as clean surplus accounting. He says the most prominent investor who uses this method is Warren Buffett. Here’s a quick overview of how clean surplus accounting works:

-Traditional accounting determines the return on equity (ROE) by using earnings from the income statement divided by the book value (owners’ equity) from the accounting balance sheet. “This is not a good measure of comparing one company to another because that’s not what it was meant to do,” Dr. Belmonte says.

-Clean surplus instead uses net income from operations as the “return” portion of the ROE. It then constructs its own “owners’ equity” as the “equity” portion of ROE.  The return on equity, as configured by clean surplus accounting, is truly a comparable method of measuring the efficiency of a company’s operations, Dr. Belmonte says.

-Net income minus dividends, of course, will net a different owners’ equity than will earnings minus dividends. It is this new calculation of owners’ equity (net income minus dividends) that allows a truly comparable return-on-equity ratio to be developed. And it is this comparable ROE ratio that is the foundation of the success of clean surplus, Dr. Belmonte says.

With a potential recession looming on the horizon, Dr. Belmonte says, it’s vital that you review your portfolio, examine whether you have cyclical or non-cyclical stocks, and then put those companies to the clean surplus accounting test.

About Dr. Joseph Belmonte

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.