Geraldo Lamounier shares his view as an investor and advises leaders on achieving better performance in the economic sector.

By: Renata Filippi Lindquist & Renata Pereira

Geraldo Lamounier, our guest this time, is one of the founding partners of ETRNTY Family Office, a Multi-Family Office created to help families manage their wealth holistically.

The institution's investment process begins with an in-depth diagnosis in which they map the reality of the family's wealth, the family's recurring needs, the wishes and dreams to be pursued, the limitations inherent to the markets and to the risk profile, and the legacy to be passed on to the next generations and to society.

Based on this process, they outline scenarios together with the families and, through an in-depth actuarial analysis, help define the most suitable portfolio in terms of risk vs. return, managing the entire estate more efficiently.

In this conversation, Geraldo puts the current global scenario in context and brings us economic perspectives:

  • A process of deglobalization, with production chains being reorganized;
  • The war between Ukraine and Russia: major food producers and suppliers of fertilizers, oil and natural gas;
  • Strong trade tension between China and the United States;
  • A drastic change in the world's population pyramid.

Against this backdrop, let's assess how Brazil is likely to behave in the short and medium term.

Despite the international complexity and a deeply divided Brazilian political environment, Geraldo is slightly optimistic about Brazil's prospects.

In the first half of the year, two important reforms were submitted for approval: i) the Federal Government spending cap and ii) the consumption tax reform – agendas typical of right-wing politicians.

If these first reforms are approved in full, we will move on to discussions of more left-leaning topics, such as income tax reform. Naturally, we should see greater resistance from parts of society, in a more hostile environment with the replacement of the Central Bank president at the end of 2024, the election of the new president of the Chamber of Deputies and municipal elections. There is therefore a relatively tight window for these negotiations to move forward.

How should the tax reform impact our economy?

As my partner and CIO in charge of ETRNTY's Investment Area, Marcelo Brisac, says, the term “reform” says a lot. Every reform costs more than we wanted, takes longer than it should and turns out worse than expected. This one will be no different.

Many people have a very optimistic view of the impact on the economy, but there is no evidence that this will materialize. To give you an idea, neither the rate of the new tax nor how many taxes there will be has been defined: initially the VAT (IVA) would replace 5 others – IPI, ICMS, PIS, COFINS and ISS – and now, with the exceptions already foreseen, there could be as many as 4 taxes.

The approval of the VAT will clearly simplify the calculation and collection process a great deal, but potential disputes and litigation are likely to continue for a long time. There will be challenges to the legality of the reform and to the use of existing credits. Another complex point is that the transition to the new tax takes place between 2029 and 2033, and the transition from origin-based to destination-based calculation ends in 2078 (Congress is still discussing shortening this period).

We at ETRNTY Family Office believe that capital allocation following an economic logic (rather than the logic of incentives) should help GDP growth by between 0.2% and 0.5% per year, well below the view of many economists.

Finally, the reform may come at a very high cost to the federal government through the compensation fund, which will offset the fiscal and economic losses of some regions. The reform needs to be very well defined so that it does not become a “factory of hidden liabilities”. The Senate is trying to limit this process, but there is still room for last-minute opportunism.

What is your view of the economic scenario for the second half of the year in Brazil?

The economy should slow down to contain inflation and put it on track toward the target. The discussion will revolve around how hard the landing will be: this process may be influenced by the international situation, as I mentioned at the start, and by the Brazilian political environment.

In the 1st quarter we had a very favorable surprise from agribusiness, but interest rates that are still high should lead to a slowdown in the economy. If the economy does not slow down, COPOM will have been wrong to cut rates on August 2 and will have to interrupt the cutting cycle. The labor market is strong and installed capacity utilization is also high. Either the economy slows down in the 2nd half of the year or we will have more persistent inflation, further from the center of the target.

There is great concern about the balance of the debt-to-GDP ratio. If the Federal Government manages to maintain this balance and generate a fiscal surplus with the proposed reforms, we may begin a period of GDP growth that is more robust and consistent than what we have seen over the last 20 years.

Which sectors should perform best in this 2nd part of the year?

We do not analyze individual sectors of the economy. It is already hard to predict the path of the economy as a whole; subsectors are even harder. We leave that to specialized managers. If the economy is going to cool down, the logic would be to move toward export-related sectors or public utilities (water and sanitation, electricity, gas).

In any case, falling interest rates will affect companies' cost of capital, helping their results, and some investment projects may be taken off the shelf, which tends to generate positive results in the long term. We cannot forget that there is a new basic sanitation framework that calls for a great deal of investment and, consequently, job creation, not to mention the significant improvement in public health.

What tips would you give Brazilian investors?

Brazilians love a tip, don't they? That is dangerous: it only takes following a wrong “tip” 2 or 3 times in a row to turn an investor into a debtor. Asset management should not be based on tips, because no one knows what will happen in the future. What we have in Brazil is a recent track record (of 20 years) of major asset classes that tend to behave more predictably. For an investor with a minimum horizon of 7 years (the period needed for these historical patterns to play out), inflation-linked bonds (NTN-Bs) are practically unbeatable.

Geraldo concludes that every investor needs to build a diversified portfolio, with good managers, taking into account their liquidity needs and risk tolerance. "And the best tip I can give is to suggest that investors spend plenty of time on this planning stage (which no one likes doing), because it will account for 80% of the gains they will obtain in the long term. Everything else is almost “details”."

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