Private banking: The wealthy look abroad as Brazil’s brilliant future dims

By:
Rob Dwyer
Published on:

In the past year the country’s private bank clients have been persuaded of the need to diversify into global investments – not as a panic measure in a time of crisis but as a regular aspect of their allocations.

"In the future, 2013 will be seen as a turning point in the cycle that followed that of 2008," says Alexandre Gartner, HSBC’s investment director of private banking in Brazil. "Ever since we went into the crisis, the whole world has been in a single mode of monetary easing and the relative outperformance of emerging markets to developed markets. In the second half of last year the markets departed from this reality and the reversion of this monetary stimulus will have a very significant effect on how people perceive their investments. The [investment] stories that worked in the past few years won’t necessarily work in the future. Geographies will change at different speeds and will have an important effect [on investment portfolios]. And in 2013 – especially the second half – investors woke up and began to try to get more exposed to global products and opportunities."

Regardless of the accuracy of Gartner’s prediction about how economic historians will view 2013, geographical diversification took a grip in the psyches of Brazilian private banking clients last year. Not since 2002 – when left-wing president Luiz Inácio Lula da Silva won power – has the industry experienced such momentum in money being sent offshore (although since 2002 the CVM regulations have enabled Brazilians to get exposure to international assets and currencies through onshore vehicles).

Marco Abrahão, head of Credit Suisse Hedging-Griffo Private Banking in São Paulo
Marco Abrahão, head of Credit Suisse Hedging-Griffo Private Banking in São Paulo
Some market participants, though, trace the origins of the 2013 shift abroad to the fourth quarter of 2012. Marco Abrahão, head of Credit Suisse Hedging-Griffo Private Banking in São Paulo, says: "Since 2003 our wealth generation has been kept locally. Until the end of 2012, when there were lower interest rates [Brazil’s Selic hit a low of 7.25% in late 2012 before beginning to rise in the second quarter of 2013] and a different outlook for Brazil – there was a lot of information regarding the fiscal debt in Brazil and some headwinds from the US and the talk of tapering. And there was also the devaluation in the real, which started the year [2013] at R$2 to the dollar and ended up close to R$2.40."

Domestic staple asset classes also performed badly, many for the first time in a long while. Real rates products (floating, inflation-linked notes) gave back a lot of their outperformance generated in recent years in 2013. Real estate had a tough year; real estate investment trusts performing particularly badly. Equities again had a poor year and while there was an amazing performance from many active managers during this time – many matching CDI with absolute return, which is impressive alpha generation in a falling market – in general the multimarcados had an average year at best. Challenging domestic returns looked even worse when considering the exchange rate impact.

Renato Cohn, partner and co-head of wealth management at BTG Pactual, reinforces the theme. "For a very long period here in Brazil, as the local economy was growing much faster than the developed markets, most of the money stayed here," he says. "We had a strong real and the whole market was very profitable during 2013. It was a year of a lot of changes: the currency came from R$1.70 to R$2 [to the US dollar] in 2012 and in 2013 from R$2 to R$2.40. The depreciation was very fast, and not many clients took advantage of that, but if you look at the longer-term diversification in terms of assets, it makes sense we think. We will have a much more balanced world in terms of growth, and we have been recommending clients to look at regional diversification in asset allocation – not because of the currency but because of [the likely benefits of] a balanced portfolio."

But if Brazil’s rich have finally bought into the need to diversify into foreign assets and currencies, the execution still needs work. João Albino Winkelmann, the head of Bradesco Private Bank, says that last year was a record one for sending money abroad: "We hadn’t seen that kind of movement since 2002 when Lula was elected and a lot of Brazilians got scared," he says, although he adds that 2002’s flows were substantially larger than those witnessed in 2013. "We have to learn that global diversification is a part of life and do it on an ongoing basis. Brazilians still send money abroad only when they are scared and when they see turmoil or when they feel there is political or economic instability. That’s when they think they should have 10%, 15% or even 20% of their portfolio in hard currency and they don’t care about the exchange rate. In fact, they like [buying] expensive dollars, and then when the dollar falls a bit they relax and only react when the currency goes back up."