An avenue in Parnaiba, second most populous city of Piauí

Investing in Brazil: risks and the best options

With the dollar at almost R$ 4.00, many Brazilians abroad and foreigners should be thinking about investing in Brazil. There are several ways to invest in Brazilian assets and it is not always necessary to open an account or send the money to Brazil. For Brazilians living abroad, maintaining investments in Brazil is possible but the way you invest and the possibilities available change according to your situation abroad.

In recent years, internal and external socioeconomic factors have influenced the decision of many Brazilians to seek a better living condition outside the country. The high unemployment rate here and a great demand for qualified professionals in countries such as Portugal, Canada, Australia and Ireland contributed to a significant increase in Brazilian emigration.

According to the Internal Revenue Service, 55,402 Statements of Definitive Exit were delivered between 2014 and 2016, an increase of 81.61% compared to the period between 2011 and 2013.

For brazilians living abroad, especially in more developed countries, financial investments generally do not have the same level of profitability they have here in Brazil, even with our basic interest rate at 6.5% per year and with a downward trend in months. Depending on the country, a financial application can yield around 1% per year. Even outside the country, for whatever reason, the Brazilian market remains a very attractive option for those who want to take advantage of the low-risk profitability opportunities of public securities issued by the Federal Government, for example, which still offers one of the largest interest rates.

The Brazilian economy in 2019 and beyond

The Brazilian economy in 2019 is being widely discussed by economists and specialists in the area already in the first months of the year. The dreamed up resumption of international investment and growth forecasts are encouraging, but much remains to be done until this scenario is solidified. At this moment, the return of national development is tied to the decision-making of the new president Jair Bolsonaro. The new government’s liberal ways, promises of spending cuts, and pension reform are all aspects that encourage foreign and domestic investors.

With a government proposal aimed at opening up the economy, the presence of Jair Bolsonaro in the national administration is also seen as promising outside the country. One example was the response of the International Monetary Fund (IMF), which increased Brazil’s projection for expansion of this year’s Gross Domestic Product (GDP) to 2.5%. The previous number was 2.4%. In his administration, Bolsonaro promises strategic actions to attract investors. The initial 5 months of 2019 do not live up to the hype. Not much has been done and no promised reforms were approved yet.

An avenue in Parnaiba, second most populous city of Piauí
An avenue in Parnaiba, second most populous city of Piauí with only 150.000 residents. Talk about opportunity.

Risks of investing in Brazil

Let’s understand which are the main risks of investing in Brazil:

  1.  Inflation: When inflation rises in the country the money loses purchasing power. Thus, the returns on investments in reais are corrupted by inflation. Moreover, when inflation is above the Central Bank’s target, it raises the economy’s basic interest rates to fight it.
  2. Interest: The basic interest rate of the economy, the SELIC, is the basis for income in fixed income. The higher, the higher the interest on fixed income securities. On the other hand, interest rates increase corporate debt and discourage consumption in the economy. This generally worsens the results of listed companies.
  3. Exchange Rate: The appreciation of the dollar may increase inflation, and therefore interest. But it can also increase the profit of exporting companies and discourage the consumption of imported products, increasing the consumption of Brazilian products.
  4. Legal risks:  Changes in legislation may affect the activity of Brazilian companies. For example, with the increase of taxes.
  5. Political Risks: Changes in politics can generate legal and economic changes in the country.

A few ways to invest in Brazil

Now that you understand the risk of investing in the country, here are some ways in which you can do that:

  1. Acquire shares of funds in the country in which you live, whose financial assets are linked to Brazilian assets. A good option is to acquire stock ETFs, since they diversify necessarily, reducing the individual risk (interesting for those who live and work abroad and can not keep up with the Brazilian market). Another good choice of funds are bond funds. Like the ETF of Emerging Markets Bond ishares. But you can look for funds that invest exclusively or primarily in Brazilian securities.
  2. Acquire ADR. American Depositary Receipts of Brazilian companies, which are traded in the United States. Basically the ADR is a way to buy shares of Brazilian companies in the United States. The shares are bought and held in Brazil, but receipts of deposits of these shares are issued. Outside you can get those receipts, which are backed by real shares here.
  3. Apply directly on a brokerage participant of Bovespa using its bank abroad, through the simplified register.
    This is  little known procedure, but made possible by Resolution 2,689 / 01 and IN CVM 419/05, updated by IN CVM 505/11. This Normative Instruction made the Simplified Register of Non-Resident Investors an interesting way of acquiring stocks, real estate funds, etc. Real estate funds, for those who do not know, are “small pieces” of real estate, usually leased, that pay rent to quota holders (such as American REITs). These funds can be purchased on Bovespa.

My favorite way to invest, specially in Brazil: real estate

1. Invest in land on the major capitals, tourism destinations or secondary cities

They are great generators of wealth. Investing in land around large Brazilian capitals is guaranteed long-term appreciation. This is because Brazilian cities are expanding horizontally at an accelerated pace. There are also several ways to invest and profit from land in the short and medium term.

Many luxury condominiums in Brazil are built in real swamps, flooded grounds around ponds that would not have any value in the eyes of an ordinary person.

2. Invest in real estate before construction

In the last years before the Temer years recession, many people bought real estate in the plant paying only 20% to 30% of their value to resell them 1 or 2 years after the start of works with huge gains. This is possible with the use of the technique that allows to multiply the profitability through indebtedness.

It is necessary to know how to evaluate the property correctly. Not every property in the plant is really advantageous when it is intended to sell it before the delivery of the keys to profit from the premium.

3. Investing in used real estate

At the moment, thousands of used properties are stranded in real estate. They are apartments and houses despised by the final consumer in many secondary cities of Brazil and for me these are the most attractive. A lot of people built or purchased and couldn’t pay

4. Investing in real estate for lease

The secret of the lease is in the correct choice of real estate. There are great opportunities in different segments like popular real estate, flats, commercial rooms, shops, sheds, vacation homes and hotels. It is important to know each of these businesses. The best rental investment option may depend on the characteristics of the city where you live and your investor profile.

5. Build real estate to sell or rent

When you buy a property you are ready to pay the cost of construction and the profit of who built. And believe me, this profit is absurdly high. This type of investment is much practiced by investors.