May 17, 2022

The Catholic Transcript

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How could they be affected by the war in Ukraine?

How could they be affected by the war in Ukraine?

The conflict has historical roots and has been accelerated by negotiations for Ukraine’s accession to NATO (NATO), a military alliance led by the United States and established during the Cold War with the aim of uniting Western countries and protecting them from possible aggression from countries outside the alliance, especially the former Soviet Union.

Having introduced the roots of the conflict and major developments up to the time of writing this article (see below)—and taking any value judgments out of the equation for a moment regarding the legality or otherwise of the Russian invasion—let us turn our attention back to the potential effects this war can bring to your fund investments. real estate.

The conflict between Russia and Ukraine

Since Ukraine – a currently independent country but a former member of the Soviet Union – has not formally joined the Western alliance, the member states of NATO So far, they have been limited to sending financial resources and imposing economic sanctions on the Russian government and companies, as well as confiscating the assets of the oligarchs. Russians Linked to Vladimir Putin, the Russian president who has been in power since 1999.

The action of the Western military powers, which some considered timid – despite the Kyiv government’s pleas for military assistance – was meticulously calculated in order to avoid a large-scale conflict, which could lead to World War III and the use of nuclear weapons, which obviously have dire consequences for the world Whole.

How does the war affect Brazil?

To understand how this conflict can affect your pocket, it is necessary to understand how it also affects the Brazilian economy in particular.

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Despite its manifestations against the conflict in the United Nations (UN) General Assembly, the Brazilian government, through the executive branch and/or via diplomatic bodies, has been cautious in Brazil’s position on the issue in question.

This is because Russia is an important trading partner in the sale of fertilizers, an essential input for agriculture, which today is the main driver of Brazilian GDP (Gross Domestic Product).

Although the direct effect is relatively limited to Fertilizer importA protracted war scenario could lead to higher prices for commodities (raw materials) in general, with risks of shortages of products such as corn, wheat, oil and natural gas. This scenario of rising commodity prices will directly affect global inflation, including in Brazil.

Effects on real estate funds

So we discovered that inflation is the key word for understanding the effects of this conflict on real estate funds (FIIs).

However, in the case of a protracted war scenario in the region, it is expected that we will have a scenario of high inflation. Thus, dividends paid by CRI FIIs (Certificate of Real Estate Receivable Trusts) – which, in general, have mechanisms that allow inflation to be calculated more quickly – tend to benefit at this time.

Brick real estate trusts, those that invest directly in real estate, also capture rising inflation, but leases, for the most part, have an annual correction, slowing inflation control in this case.

However, if we look at the half-full side of the glass, there may be a greater influx of money from foreign investors who have portfolios focused on emerging countries. This flow can be explained by three factors:

  1. Rotation of global investment with an emphasis on growth for those who focus on value, i.e. the most mature companies;
  2. Increased exposure to commodities, and
  3. Entry multipliers are very low due to favorable exchange rate
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According to Bloomberg data, Russia currently owns 1.45% of the shares traded in an emerging market ETF (EEM), while Brazil owns 4.94% of the shares. Therefore, Brazil may continue to receive inflows from emerging market investors who wish to reduce their exposure to Russia.

This movement should be better observed in the stock market, but it should have a limited upside in FIIs – since this is an asset class that is mainly held by local investors and, therefore, tends to surf this wave of investor allocation less.

what are you expecting

Regardless of the causes that led to the war, every armed conflict is catastrophic and we hope it will end peacefully as soon as possible so that normal life can be resumed in the affected areas.

Because the consequences of a world-wide conflict with the use of nuclear weapons would be devastating and immeasurable, and could lead to a stagflation scenario, which would be a case of high inflation and economic stagnation simultaneously.

However, a vigilant investor must analyze the scenario, diversify investments in different risk factors and protect himself from possible fluctuations in order to avoid permanent losses in equity.