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From darlings to ‘villains’: BDRs drown in chaotic international scene

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Jerome Powell is central to the macroeconomic drama sweeping international financial markets (Image: Facebook/Federal Reserve/banking.senate)

It has been two years since the CVM approved the new rules for investments in BDRs (Brazilian Depositary Receipts). Since then, B3 has formed a catalog of more than 900 assets, which represent shares of companies traded outside the country.

If in 2021 the low international interest rates and the dollar high values ​​supported good returns for those who invested in BDRs — with manufacturers BioNTech (B1NT34), Moderna (M1RN34), Pfizer (PFIZ34) and Astrazeneca (A1ZN34) leading the ranking, with returns ranging from 50% to 200% — the scenario is radically different in 2022.

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Inflation stuck hard in developed economies and, unaccustomed, the US and European Central Banks took too long to respond. Today, bankers seek to chase losses, namely a average inflation above 8.0%driving aggressive cycles of interest rate hikes and even understanding that a recession may be a reasonable final price to pay.

Inflationary persistence and the pivot of the expansionary policy of the Fed and other Central Banks towards monetary contraction have already caused a fall that exceeds 20% in US stock indices. According to a study by the financial consultancy Bespoke Investment Group, coordinated settlements of equities and sovereign bonds makes 2022 the worst year for the US financial market in 50 years.

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Faced with this turmoil, is it possible to think about investing in these assets? “Only as a diversification strategy”, says Ariane Benedict, capital market specialist and economist at CM Capital. In the economist’s assessment, investors need to keep in mind that the contractionary scenario will bring more downward pressure to foreign stocks, exposing the BDR class to greater volatility in the medium term.

But for the investor who wants to weather the storm, the recommendation is that he at least carry an umbrella. In the case of BDRs, the economist at CM Capital believes that this may mean prioritizing the shares of companies that are being traded at prices below their intrinsic value – the so-called ‘value investing‘ in Warren Buffett.

Dividend-paying stock BDRs can enrich defensive strategy

Among the companies that fit the ‘value investing’ strategy are those capable of paying good dividends, due to a well-established cash balance that is resilient to market volatility.

According to the analysis of the banking group Julius Baerhigh-dividend securities are proving to be cheaper than average, with advanced P/E (a change in a stock’s P/E that measures future appreciation potential) measured at 12.2x, down from 15.4x of global actions.

Still, they beat the markets’ overall performance in 2022 (-8.3% versus -18.5% for global equities) and have done so historically. Since 1995, dividends have accounted for 44% of the markets’ total return in USA and 64% in Europecompletes the consultancy survey.

In Brazil, investors can access large dividend-paying stocks through aristocratic and king BDRs, evoking a classification made in the US: while aristocratic companies refer to companies that have increased dividend payments uninterruptedly for the last 25 years, ‘BDRs kings’ do so for 50 years, and so are much rarer.

But what exactly are these roles? 3M (MMMC34), Coca-Cola (COCA34), Colgate-Palmolive (COLG34), Johnson & Johnson (JNJB34), Lowe’s (LOWC34), Procter & Gamble (PGCO34) are some of the ‘noble blood’ companies that paid the highest dividends in recent years.

In 2022, the US Standard & Poor’s ranking of the top 10 dividend payers includes energy industry heavyweights such as Exxon Mobil (EXXO34) and Chevron (CHVX34), as well as domestic consumer companies such as Genuine Parts. & Co (G1PC34).

Growth investing BDRs are still preferred

According to the economist at CM Capital, when it comes to BDRs, Brazilian investors still prefer greater exposure to ‘growth’ companies, that is, those with adjusted pricing, but with a high expectation of future returns. Tech giants and fintechs like Nubank (NUBR33), Xp Inc. (XPBR31), Apple (AAPL31) and Tesla (TSLA34) are some of the names that appear among the most sought after.

What draws attention is that these companies, due to the characteristic of a leveraged business model and dependent on a lower cost of capital, are the ones that should suffer the most from the ongoing monetary contraction: “my expectation is very negative for these companies”. companies at that moment, subject to the worsening of the cash flow. It would be more opportune to reduce exposure by migrating to ‘value’ companies”, he concludes.

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Source: Moneytimes

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