Brazil private banking debate: Private bankers cushion the blows in Brazil

Rob Dwyer
Published on:

The country’s economy is going through tough times, putting a greater onus on private bankers to look after their clients’ investments. An emphasis on overseas diversification of portfolios is crucial. However, domestic investments still take up the greater share and require careful management


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Executive summary

• Shift to offshore equity exposure
• Inflation-linked fixed income still a good domestic strategy
• Client base looking to spend more money and time abroad
• Further turmoil ahead, but it will bring buying opportunities
• Political stability is key to investment strategy
• Private banking is thriving despite the downturn

 Read more about the participants

Rob Dwyer, Euromoney It's been a very challenging year in Brazil, with a deepening recession and political paralysis. How protected have clients' portfolios been and is it too late to add in further protection against down-side risk? Or is now the time to be looking for value in depressed assets?

Luiz Severiano Ribeiro35

LR, Itaú Our portfolios are performing very well. We haven't been very optimistic since last year - mainly after the result of the elections - so clients are well diversified and hedge funds have helped produce a good performance in the last 12 months. Also, this year the currency has protected a lot of portfolios, in terms of real-denominated returns. On average our clients have between 25% and 30% of their portfolios invested offshore, which helped a lot. 

Since last April we have been underweight local equities, since the Ibovespa was around 54,000, and we also went overweight in real interest rates when rates were around 6.20% and we got back to neutral when they were around 7%. The big difference between the current situation and 2008 is that clients at this point weren't very optimistic, so they didn't have a lot of risk in their portfolios, with no significant leverage. 

Paulo Meirelles35

PM, Itaú Since the [Brazilian securities regulator] CVM's new regulation, which allows clients to invest overseas in real-denominated products, it really helped the lower end of our client structure. In the past smaller clients had difficulty in investing overseas. However, during the last two years, they have started doing exactly what Luiz said - they have diversified about 25% to 30% of their portfolios into non real-denominated assets. 

Marco Abrahão35

MA, CSHG I remember our discussion in 2013, when we said that we were preparing for global asset allocation. We saw a strong dollar and a strong US economy, and also an opportunity in Europe, so we have been allocating and investing abroad under CVM Directive 465 on our platform that we had set up in 2009. We launched a real estate fund in Europe, which is doing well. We have been able to connect our boutique in Brazil with our global franchise to invest in global funds abroad. In 2014 due to the local scenario and high interest rates it was hard to carry the positions, we had a lot of meetings and events with clients because we saw a lot of volatility but we were able to convince them to keep the international positions, and now we can see that paid off. 

Sylvio Castro35

SC, CSHG We have been holding tight to two theses throughout the past three years: the first was that in the last decade, Brazilians experienced a process of getting richer in hard currency that was not supported by the growth in productivity, so it was expected that a reversion would follow. The second thesis was that, unfortunately, because of our macroeconomic policy, it was very likely that Brazil would become more and more a place for rentiers rather than business people.

So, based on these two theses, we did a couple of things. First, we aggressively reduced our portfolios' exposure to middle market credit, and we kept only very high-grade, very liquid credit. Second, we reduced our beta in the equity portion of the portfolio. We also focused our portfolio towards the offshore market for exactly the same reasons why we saw problems in Brazil - namely, the high cost of energy, high cost of capital, high cost of labour. 

We saw the opposite in the offshore market. As a consequence we started thinking that it is better to hold equities overseas and bonds locally. Our equity position became a very small exposure to local equities, a very large exposure to global equities, and some exposure to cash, which has created a very decent cushion throughout declines in the Brazilian stock market. 

Finally, we think about the offshore part of our allocation as basically a composition of both tactical and structural. The tactical part has performed marvellously through hedge funds, and that is something that can be seen across the industry. In addition we made a very important move with our clients, by convincing them that low volatility doesn't mean low risk. In order to protect clients from the painful process of adjustment of Brazilian society, we advised clients that this process would be manifested through a weaker local currency, higher inflation and higher taxes. The tax element is something that is very complicated for us to do anything about - it is a fact of life - but there are lots of things we can do about inflation and currency depreciation. Most of the performance that you can see in our portfolios is coming more from the capital protection strategies, which are proving very effective as the broader markets are becoming very concerned about Brazil's problems. The risks that we foresaw are now coming true - and perhaps even stronger than we expected.