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Private banking clients in Brazil have been spoilt for decades.
The country’s wealthy have been able to invest in single-product, sovereign-backed, tax-free investments linked to the (typically high) overnight interest rate, with daily liquidity. They have been able to generate very strong real portfolio returns with virtually no market or credit risk.
That, finally, is changing and, while it will be a benefit for the nation that the state will not be paying out such large returns to Brazil’s wealthy, these investors are facing a new investment characteristic: risk.
Nominal rates are falling rapidly – expected to hit 6.5% at the end of this cycle, according to Itaú, from 14.25% in August last year – and real rates are expected to fall into low single-digit territory. Those rates may look good to investors in developed markets but terrible to Brazilians, who are accustomed to near double-digit rates.
We have been here before, albeit briefly. When previous president Dilma Rousseff pressured the central bank to lower the benchmark Selic – the Brazilian central bank’s overnight rate – to 7.25% in October 2012, inflation was rising and real rates went negative with some fixed income investments.
