Investment for Expats in Brazil

Submitted: May 2014

As in any country, expats should be concerned with beating inflation and taxes to preserve the value of their savings. In Brazil, the markets tend to offer inflation-busting yields, even after tax.

Inflation is a personal matter, as you must determine for yourself which inflation you want to beat. If you are a long-term immigrant, you are likely to be concerned by Brazilian inflation. If you plan to return to your home country, you might prefer beating the inflation rate of that country.

Remember that you invest for a purpose, and that this purpose is specific to you. If the purpose of your savings and investments is 100% outside Brazil but you invest in any BRL-denominated assets, you are effectively making a currency bet.

In Brazil, financial institutions generally charge a lot. Investments should thus be made with absolute care. As a rule, heavy charges would normally mean you are investing for the long-term.

Be wary of the financial transactions tax (Imposto sobre operações financeiras – IOF) as well. The rates may vary considerably from one year to another, as this tax is used by Brazilian policymakers to regulate its financial markets.

Inflation in Brazil - overview

Inflation in Brazil is subject to central bank monitoring. There is an official inflation target of 4.5%, plus or minus 2%. In practice, inflation can be expected to stay in the upper band, say 5.5%-6.5%.

Over the past twenty years, interest rates in Brazil have largely exceeded inflation, which is good for savers.

For more information on monetary policy, see Foreign Exchange for Expats in Brazil.

Where to invest?

The starting point should be with your Brazilian bank. In most cases, your bank will offer various services to manage your savings and investments in Brazil. This would typically include savings accounts, share dealing accounts, investment funds and structured products.

An alternative for expats is offshore investing. This option may be attractive for highly mobile expats or for high net worth individuals.  However, offshore investments will not be the easiest thing to manage, nor will it be cheap. Generally, exposure to the Brazilian market is best made onshore – unless you can afford spending thousands of dollars on advisory fees to do it offshore.

Fixed income

Fixed income is the starting point when you invest in Brazil. It’s the type of investment that Brazilians prefer.

Overall, Brazilian savings accounts tend to have inflation-busting yields. Currently, you could expect to get 6% on an easy-access savings account, tax-free. However, there is considerable room to get better yields on riskier investments, even if you wish to stay on fixed income.

In Brazil, the Government’s 10-year debt sells for a yield in excess of 12%. That yield is before tax, and it has oscillated between 9 and 16% over the past decade.

It should be noted that Brazilian residents must pay IOF at a rate of 2% on their transfers of fixed income securities. This obviously makes such investments less financially attractive than they initially sound.

Brazilian securities (costs)

Do consider carefully the applicable transaction costs if you wish to trade Brazilian securities. Brazil tends to be quite an expensive country in that respect, so caution is strongly advisable.

Here are the main costs you should be aware of:

Online trading platforms tend to be cheaper when it comes to share dealing. In any case, feel free to compare the broker’s fees charges by Brazilian banks.

Brazilian stock market (overview)

The main stock index in Brazil is the BOVESPA. About 10 listed companies account for half of the BOVESPA’s trading volume.

Since the last wave of hyperinflation in the mid-1990s, the index has nearly decupled. Such a rise is broadly in line with the inflation adjustment. Consequently, Brazil’s share prices cannot be viewed as overvalued merely because of previous price rises.

Part of the uptrend in the 2000s can also be explained by diminishing interest rates on the market. Actually, the central bank interest rate started the decade at about 20%, and it closed the decade below the 10% mark. Interest rates have risen again over the past two years, which may explain why prices have stalled in recent history. This is potentially an opportunity to buy shares in Brazilian blue chip companies.

Dividend yields may leave to be desired, as they are below inflation. For a Brazilian company with stable profits, you could expect to get between 3 and 6% tax-free. Hence, share investments may only be worth the price if you can expect to make good capital gains. Over the long-term, you safely expect a 5% capital gain per year just as a result of inflation. Should interest rates decrease in the future – which is likely – further capital gains can be expected.

Be wary of volatility when you invest in securities. Volatility is also highly dependent on fundamentals, especially macroeconomic fundamentals and the company’s risk profile. Typically, higher risk means higher reward, and some securities may be viewed as low-risk. You are responsible for deciding how much risk you want to take on. There is no set answer to this question, as this largely depends on your personal circumstances. A qualified financial adviser may assist you regarding this matter.

On the stock market, your emotions are your enemy. You must control them rather than let them control you. Do not, under any circumstances, let (natural) psychological factors make you take irrational decisions.

FX carry trade in Brazil

Carry trade operations may have some financial relevance for many expats in Brazil, especially high net worth individuals. Whether you might consider using Brazil in a carry trade depends on whether you can borrow money in a foreign currency. The market conditions would have to offer a special opportunity as well.

Carry trade is an investment strategy which consists in borrowing in a low interest rate currency in order to invest in a high interest currency, such as the Brazilian Real. In such a situation, the only way you could potentially lose money is through foreign exchange losses. Given that high interest rates often come along with high inflation, the high-yield currency is likely to depreciate over the long-term.

Financially speaking, carry trade is a high-risk/high-reward operation because of the leverage. If your borrowing currency appreciates too fast, your initial investment may quickly turn into negative equity – unless you have both reasonable leverage and sound financial education. Obviously, carry trade strategies come along with fees as well.

Carry trade opportunities

From a strictly macroeconomic point of view, carry trade opportunities may appear when there is a genuine mismatch in real interest rates between two jurisdictions. If the US markets offer a real interest rate of -1% whereas Brazil offers 2%, international investors may be tempted to move their investments into Brazil. Consequently, it is not financially sound to borrow in a currency whose real interest rates aren’t poor.

An opportunity could also arise if you think the Brazilian Real has depreciated too fast in recent history, thereby making its exchange rate quite low. But in the event you wish to bet against a recent depreciation, you should check what its driver is. If it is powerful enough, you might wish to let the storm rage.

In practice, there is a musical part of it as well. Carry trade hasn’t been much talked about over the past two to three years, as such strategies are typically pursued when the emerging markets are fashionable, not the other way around. Another reason for today’s lack of interest in carry trade can be that the real interest rates across the world have become much closer to each other.