The recent devaluation of the Brazilian real and the subsequent rise of the dollar has sparked significant capital flight from Brazil to the United States, driven by increasing fiscal concerns and the political climate surrounding the return of former President Donald Trump to the White House.
According to reports from O Estado de S. Paulo, this mass exodus of Brazilian investments may be here to stay. The American brokerage Avenue, which is partnered with Itaú Unibanco, has recorded at least a 20% increase in investment volume during December compared to November, traditionally a weaker month due to the holiday season. Even without disclosing exact figures, Avenue’s CEO Roberto Lee noted, "When the perception of the risk within Brazil began to heighten for Brazilian investors, there was this mass movement of resources going out. We’ve now passed November and likely will see 20% to 25% higher volume this December."
The motivations behind this investment migration are rooted primarily in conservative strategies, with more than 80% of the fleeing funds being directed toward super-conservative assets, mainly short-term Treasury securities and corporate bonds. Lee explained this behavior, stating, "When the dollar rises, this conservative audience reacts differently. They only move during moments of insecurity. So as they feel more risk, they move."
The devaluation of the real is occurring against the backdrop of significant fears surrounding Brazil's fiscal environment. The Federal Reserve's signals about interest rate cuts are also contributing to this financial shift. For Brazilian investors, the basic interest rate remains high, which should logically attract investment. Yet aversion to risk is prompting capital to seek safer harbors abroad.
Data from the Central Bank shows Brazilian investments abroad exceeded $10.6 billion as of November 2023, more than double the $4.511 billion recorded for the entire year of 2022. The all-time record for overseas investments stands at approximately $15.4 billion, achieved back in 2011.
Lee suggested these trends might indicate structural changes, saying, "The current volume of transfers Avenue has experienced is unprecedented. This time, we’re dealing with a structural movement, meaning it’s likely to sustain even as the exchange rates stabilize." He also highlighted the importance of diversification strategies, noting the increasing number of individual and institutional investors redistributing their wealth outside Brazil.
This behavioral shift is indicative of broader worries about Brazil's political and economic stability. Concerns intensified following President Luiz Ignacio Lula da Silva's proposed fiscal package, which many investors perceived as inadequate to address the country’s rising public debt. The instability has pushed the Credit Default Swap (CDS) for Brazil—used to measure credit risk—to recent highs not seen since March 2023.
Lee detailed the responses from Brazilian investors, stating, "The safe environment once symbolized by local rates has effectively shifted to our offshore options. This applies across the board—from individual investors to businesses and institutional players." This speaks to the growing perception of political and financial risks at home, which is forcing investors to re-evaluate their asset allocations and seek more resilient options.
Looking to the future, Avenue's rapid growth suggests it may see its asset custody volumes tripling by 2025, should the current pace of capital flight and investment strategy continue. Lee's firm has seen remarkable growth since its inception seven years ago, hoping to bolster its involvement with large international investors.
The firm also holds notable partnerships, including with Japan's SoftBank and Igah Ventures, which lend it both credibility and access to technological advancements to facilitate its growth. Lee has hinted at possible structural changes, one of which includes Itaú potentially increasing its stake from 35% to over 50% by December 2025, thereby cementing its control over Avenue. Should this transaction not take place, Avenue is poised to explore options for going public on the Nasdaq stock exchange within five years.
This strategic alignment and the rising demand for secure investments abroad constitute the perfect conditions for sustained capital flight away from Brazil, driven by investors’ pursuit of financial safety amid unpredictability.
