In an attempt to contain inflation, the Monetary Policy Committee (Copom) has raised the key interest rate (Selic) successively. As a result, publicly listed tech companies see their investments dwindling and their assets plummeting. In January 2022, to give you an idea, the reduction is up to 10%. In this context, the securities that until last year were a surety of profitability came into question and, in some cases, were not encouraging. We invited Rob Correa, investment analyst and author of The Long-Term Investor Success Guide to talk about the topic and point out short and medium-term perspectives.
1. During the pandemic period, technology was one of the most appreciated sectors. What drove the assets of these companies to rise?
What we’ve seen during the pandemic has been an unprecedented appreciation by technology companies, due to a combination of factors as well as interest, in the Brazilian case, where it has remained at a relatively stable and low level in this period, reaching 2% at the most critical point. This was a favorable context for companies to resort to the credit deflation.
Another reason relates to the increasing demand for the features offered by these companies, which increases their revenue and level of exposure to the markets. An example is Zoom [serviço de conferência remota]which achieved nearly 400% revenue growth at the height of the health crisis, with its shares valuing at accelerating rates.
2. Why is contracting credit essential to the survival of technology?
This dependence is due to the corporate business model, whose core operations are closely related to credit for financing their operations. Since they have a highly leveraged balance sheet due to the need for capital expenditures (investment expenditures to maintain business competition), these companies, all over the world, have a strong correlation with the base rate of interest of the economies to which they belong.
3. What is the result of raising the interest rate on the assets of these companies?
With Selic already priced at 12.75%, shares of the sector are having tough days. To give you an idea, just in January they experienced a 10% drop, which is increasing with each trading session. In this context, the risk to the individual investor is very expensive. As a result, investors are moving into fixed income or dividend-paying sectors, such as finance, which pushes tech companies into the devaluation hole against the market.
4. In your opinion, will the reduction process increase in the coming months? why?
I think so, and one factor that exacerbates the situation is that, with the speech of the Central Bank President, Roberto Campos Neto, that the team was surprised by the rise of the IPCA beyond expectations, the market tends to price an interest rate above 13% in the coming months, further depreciating the technical papers.
5. Is it possible to say that the level of risk in technology stocks has increased? How does this dynamic work?
In my opinion, for competitive and economic reasons, sector stocks here in Brazil are a very high risk option, and for this reason, they should make up a small part of the investor’s portfolio, which relates to risk assets. In my opinion, 5% is the maximum commitment to reduce the likelihood of commitment to the portfolio as a whole in contexts similar to the ones we live in.
6. Is it time for a portfolio review? What are the suggestions for those investing in variable income?
My recommendation to investors who want to reduce losses and rebalance their investment portfolio to continue investing in various asset classes and geographies, including in their strategy a portion of their assets invested abroad. By allocating assets appropriate to their profile and monitoring capital related to risky investments, investors are able to protect themselves from crises and get closer to achieving their goals of financial calm.
7. Can investments abroad include contributions to technology companies?
Abroad, these firms experience the same dynamics with respect to the interest rates they are subject to; However, the competitive advantages of companies in this sector, especially US companies, tend to be greater. With the Fed threatening to raise interest rates at least five times in 2022, it’s important to know that companies with this demand will suffer negative effects. It is also interesting to note that it is part of the growth strategy, usually not the dividend, which is so dear to us Brazilians.
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