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Economics

Investing in dollars can neutralize exchange rate impacts, research shows

According to the survey, the suggested percentage of investment in dollars is at least 16% of the internationalized investor's asset portfolio.

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Investir em dólar pode neutralizar impactos cambiais, revela pesquisa

A recent survey conducted by experts in economics and finance at FGVcef (Center for Financial Studies of Fundação Getulio Vargas) revealed that Brazilians across all income levels are exposed to the impacts of exchange rate fluctuations on their consumption patterns, making the international diversification of investments essential to preserve purchasing power.

According to the study "Exchange Rate Impact on Brazilian Consumption and the Need for International Diversification," the effect of exchange rates on Brazilians' consumption baskets ranges from 16% to 18%, depending on income levels. One key factor is that Brazilian imports account for 10% of the country's GDP, and this 10% is entirely dependent on exchange rates.

The study also highlights the impact on the IPCA (Consumer Price Index), which varies from 11% for higher income groups to 14% for lower income groups. Additionally, overseas spending affects higher income groups, representing approximately 2.65% of their consumption. Finally, exchange rate volatility, which must be neutralized, impacts all income levels at an approximate rate of 3%.

The report notes that inflation rates affect consumption differently across various sectors. In the food and beverage sector, for example, low-income families are affected at a rate of 37%, while middle- and high-income families face rates of 20.9% and 13.1%, respectively. In the housing sector, the impact is 21.9% for low-income families, 16.2% for middle-income families, and 9% for high-income families. These findings challenge the notion that only wealthy individuals are exposed to exchange rate fluctuations, showing instead that lower-income groups (classes D and E) often bear the brunt of this instability.

 

 

Claudia Emiko Yoshinaga, Francisco Henrique Figueiredo, Ricardo Ratner Rochman, and William Eid Junior, the authors of the study, argue that proper international diversification is crucial to mitigating these risks and protecting Brazilians' purchasing power. They recommend that, to neutralize the effects of exchange rate fluctuations, Brazilians should allocate at least 16% of their portfolios to foreign assets. For higher-income families, the suggested percentage increases to 18%. This is solely to safeguard consumption. However, there are additional benefits to international diversification that raise the percentage families should invest abroad.

"Exchange rate volatility has a direct impact on the price of many essential consumer goods in Brazil. When the real depreciates, the cost of these products, which are often imported or contain imported components, increases significantly," explain the study's authors. "This results in high inflation for consumers, particularly for low- and middle-income families, who are most affected by rising prices of basic goods," comments Professor William Eid Junior from FGV.

Moreover, the study emphasizes that international diversification not only protects against exchange rate volatility but also provides Brazilian investors with access to markets and sectors not available on the local stock exchange. For instance, technology and biotechnology, which have shown significant growth in international markets, are underrepresented in Brazil, limiting the high-return asset options available to local investors.

"Investing abroad allows Brazilian investors to access new opportunities and growth sectors while protecting their portfolios from local currency fluctuations," the authors assert. "This is a fundamental strategy to maintain purchasing power and ensure portfolio stability during times of economic uncertainty."

The full report is available for consultation, offering a detailed analysis of the correlation between exchange rate fluctuations, inflation by income level, and the importance of a more diversified and internationalized investment strategy.

Access the full study here