Six months ago, January 2017, I wrote a post for the Italian version of the blog (not published in the English version) titled “Investing in Brazil, or not …” in which I traced scenario 2017 for potential Italian investors. My considerations were summarized as follows:

Conclusion: keep away from Brazil, at least in the first months of 2017.

Six months later I updated this analysis, this time also for the English version and designed for US currency investors.

In January 2017 (precisely on the 10th day), the change situation was as follows:

1 euro = 1,06 US$ 1 euro = 3,38 reais 1 US$ = 3,19 reais

Today, July 17, 2017, the indexes are as follows:

1 euro = 1,14 US$ 1 euro = 3,64 reais 1 US$ = 3,19 reais

Despite the stress caused by Joesley Batista declarations (that involved President Temer in a corruption scandal), the Brazilian currency has surprisingly held against the dollar.

Bear in mind, however, that the dollar is going through a period of weakness vis-à-vis the euro, where it has devalued about 8% from January 2017 to today.

 

Americans who in January 2017 invested in Brazilian bonds

Suppose a US friend invested US $ 10,000.00 in a Brazilian bond fund in January 2017 (exactly on the 10th day):

Value in US $: 10,000.00

Value in Reais: 31,900.00

Considering that Selic (Banco Central’s discount rate) is at 10.25%, our US bond investor would be in this posotion today:

Value in Reais: 33,200.00 (average yield of 10% per annum calculated on 6 months, net of income tax of 17.5%)

Value in US $: 10,413.00

Yield in  US $: 4.1% (in six months)

 

Americans who in January 2017 invested in Brazilian stocks

Currency conditions are the same as the above example, but the American friend in question is someone more daring and invested US $ 10,000.00 in a stock fund (indexed Ibovespa, let’s say) on January 10, 2017:

Value in US $: 10,000.00

Value in Reais: 31,900.00

On 10/1/2017 Ibovespa was 62,131 points; today (17/7/2017) is around 65,500 points.

What would be the position of the American stock investor today?

Value in Reais: 33,332.00 (net of income tax of 17.5%)

Value in US $: 10,445.00

Yield in US $: 4.4% (in six months)

 

Investing in Brazil was a bad deal for Europeans but did not penalize American investors (who would have earned much more if they had invested in Euros assets).

 

What to expect in the second half of 2017?

Let us see the main variables that will affect financial investments in the second half of 2017.

Interest Rates (SELIC)

Thanks to continued downward inflation, Banco Central accelerated the descent of the Selic rate, today at 10.25%. The expectation is that it will arrive at the end of 2017 at a rate close to 8% per annum.

The political crisis does not seem to hinder this downward rate, which should be confirmed in the next 6 months.

Exchange rate

The market seems to have already “anticipated” the expected drop in the Selic rate by 8% by the end of 2017, with the US $ / real exchange stabilized in the 3.15 / 3.30 range. The exchange rate is also supported by the exports of Brazilian commodities, in particular by the exceptional soybean crops (+ 19% per annum) and corn (+ 53% per annum).

For the American investor, it will be very important in these months to follow the evolution of the dollar and see if its devaluation against the euro will continue in the second half of 2017.

Stock market

The storm struck down on Bovespa after the denunciation of Joesley Batista (17/5/2017) did not provoke a capital flight from the brazilian Stock Exchange. Indeed, foreign investors continued to invest in Brazilian shares, attracted by their low price.

If the data on the return of economic growth should be confirmed (and appear to be getting stronger), a very positive cycle could be opened for the Brazilian stock market.

 

How to operate in the second semester 2017 in Brazil?

The Brazilian bond market, even though the interest rate is rapidly falling and there is no significant revaluation of Real on the dollar, seems to be relatively attractive to US investors.

We always use the example of the US friend who is considering whether to invest US $ 10,000 or less in Brazil.

Today, July 17, 2017, the dollar is quoted at 3.19 reais and the euro at 3.64 reais

Value in US $: 10,000.00

Value in Reais: 31,900.00

If we hypothesize the dollar quoted between 3,20 and 3,30 reais at the end of 2017, what would then be the situation of the American bond investor at the end of 2017?

Value in Reais: 33,176.00 (average return of 4%, net of income tax of 17.5%)

Value in US $: 10,300.00 / 10,000.00 net of taxes

So, a yield in US $ between 0% and 3% (in six months). It’s worth? Considering the risks associated with the change, probably not.

 

The Brazilian equity market has shown that it has solid foundations to withstand the ongoing political crises and could give good satisfaction to those courageous that decided to invest in Brazil’s new growth phase: it is not hard to think that Ibovespa may return to 70,000 points by the end of the year. With all the caution, I believe that investing in Brazilian shares is less risky than six months ago, always paying close attention to the “change factor”.

Conclusion: we cannot expect a appreciation of the brazilian currency (even if the weakening of the US currency against the euro should continue in the second half of 2017), so the best opportunities may come from investing in brazilian stocks rather than bonds. But the key factor indicating the best global investment in the second half will be the US $ / Euro exchange rate trend.