R&D #5: A Brazilian hat-trick
Pelé. Zico. Ronaldo. Adriano. Neymar. Just some of the names written in history (and on the Wikipedia page for Brazilian hat-tricks) as scorers of a three goals in a game for the Brazilian national soccer team.
Well the history books (and Wikipedia) may need to add another name to the list: Lula da Silva, President of Brazil.
During his first two terms in office, da Silva performed back to back economic wonder goals. Now back in charge for a third term, Lula is looking for his hat-trick. FDI is up, inflation is down and the real is back on track, surely he can’t miss? That’s this month in R&D.
But first, to class.
🏫 Back to school: FX Options 101
If you’re raising and deploying capital overseas, you’re likely using an FX forward contract (an agreement to buy and sell currency at a set price in the future). But there are limits to the humble forward. And in volatile times, fluctuating currencies can leave GPs saddled with hefty MTM (Mark to Market) fees when contracts come due.
Enter the FX option, a financial derivative that provides the option (rights), but not the obligation, to buy or sell a currency pair at a set price (called the 'strike price') on or before a certain date. Options are versatile and better suited to emerging market investment, where large currency swings are more common.
Besides simply purchasing an option, you can sell it. This creates a universe of intricate structures which, although more complex than forwards, have fewer liquidity demands when it comes to maturity.
Carry on the lesson here.
📊 Charted Territory: Morocco among nations setting new FDI records
We clocked this chart looking at one the world’s new FDI superstars, Morocco. Deaglo’s Head of FX Risk Management Matheus Zani explains what we’re looking at.
Morocco's robust macroeconomic policies and institutional framework have enabled its economy to maintain resilience in the face of multiple adverse events in recent years, such as the pandemic, two droughts, and the repercussions of Russia's conflict in Ukraine.
Consequently, the first eight months of 2023 have witnessed an unprecedented upsurge in planned greenfield FDI projects in EM countries, including Morocco.
Morocco has become a focal point for investment, garnering nearly $34 billion in greenfield FDI projects throughout 2023. This success in attracting FDI can be credited to various factors, including a substantial influx of investments from Chinese firms, particularly in the electric vehicle (EV) supply chain. Morocco has also effectively secured substantial FDI projects in renewable energy, chemicals, and tourism.
🌎 Around the World in Deals
We’re taking a detour from the news this month to focus on all the recent raising and deploying that has caught our eye.
We’ll start in Asia, via San Francisco, where Matthews Asia ended September with the launch of five new exchange traded funds – great news for the 74% of US asset managers who see ETFs as a good opportunity. Staying in California, Metropolis, a parking app (yep) closed a $1.7bn funding round, using the funds to take LPS, a provider of parking facility management services, private in the biggest M&A transaction of the year by a VC-backed company. Over in Indonesia, Investree, a fintech startup that provides a B2B marketplace lending platform, raised a $231 million Series D from a global cast of investors including Qatar’s JTA International Holdings and Japan’s SBI Holding. Talking of Japan, the country is pulling out the stops to lure even more domestic and overseas capital into the nation’s soaring investment space. And finally, to 28 countries in Northern Africa, all of which will be the benefactor of $430 million in investment from Chinese telecom giant, Huawei.
Featured: A Brazilian hat-trick
In his first two terms in office, Lula da Silva performed the financial equivalent of Trevor Sinclair’s bicycle kick for QPR against Barnsley in 1997 followed by Gareth Bale’s bicycle kick for Real Madrid against Liverpool in 2018. Growth rose from 1.9% to 5.2%, and Brazil's trade surplus increased from $13.1 billion to $33.3 billion. Can he make it a hat-trick in his third term?
The answer? Maaaybe. With strong performances from incumbent local industries and emerging sectors, economic performance has beaten predictions at the start of the year, while the strong but undervalued real remains attractive to overseas investors.
Furthermore, the central bank has been more aggressive than its regional peers (cough cough Argentina), raising interest rates by 50 basis points in August and signaling their willingness to stick to potentially bitter-medicine to tame inflation.
But challenges remain with some investors concerned Lula has over ordered and is going to get a shock when the bill drops, causing him to raise taxes on offshore investments and investment funds.
Brazil’s traditional pillars of energy and agriculture have changed significantly since the heyday of Lula’s early terms and while this year has seen record food exports, for example, prices are dipping.
Enter green energy and a host of new international investors. Brazil is now looking to become the top destination for international renewable energy investments among developing economies, with $115 billion in projects. Key stakeholders include Asian investors, especially from China and the Middle Eastern monarchies.
Hungry for more? Head to the Deaglo blog for even more expert insights on international investment.
‘Raise and Deploy: The International Investing Podcast’ Episode 6 is now live! 🎙️
In our latest episode, we spoke to Guillaume Jouvencel and Hussam Ali to discuss Corporate Treasury, International Investing, FX hedging and more. This episode covers international financial management tactics, what CFOs, and Corporate Treasurers need to think about with international operations and much more.