The question for investors when investing in Brazil is whether it is better to invest in the equity markets or directly in the currency. While many investors may lean toward equities, it is important to note that returns on the Brazilian equity market have been largely dominated by returns on the currency itself.
With most other major currencies mixed against the U.S. dollar year-to-date, what is driving the nearly 7% return for the real? In our view, a variety of forward-looking factors may have investors bullish on the real.
After a disappointing May and June that saw many emerging market currencies depreciate against the U.S. dollar, Brazilian finance minister Guido Mantega removed the 6% Financial Transaction Tax linked to the purchase of local market fixed income securities. On June 13, the government also removed its 1% tax on currency derivatives. We view these as positive developments for Brazilian assets, given that it removes impediments to fixed income investment flows.