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Investment policy and the market are closely intertwined, so it is important for both new and experienced investors to pay close attention to the political landscape, especially during times of uncertainty like the current public, economic, and political crises in Brazil.
Political choices can have a direct impact on a nation’s development, which can influence the investment market and affect the lives of the population.
The policy also affects interest rates like the Selic rate and financial assets prices, as well as the stocks of publicly traded companies, among other things.
To avoid unnecessary risks and seize opportunities, investors must monitor political developments to safeguard their profits, predict risks, and comprehend financial market fluctuations.
Today, we will discuss how government policy can influence the investment market.
How does politics impact investments?
The policy decision on investment has significant effects, which are important for investors assessing their investment plans.
Politics has a strong and often unpredictable impact, particularly during crises like the Covid-19 pandemic.
Political choices ultimately impact interest rates and the stock market’s performance.
If monetary policy is tightened, such as in response to rising prices, the stock market will quickly reflect this through increased interest rates, impacting investor and consumer behavior due to the dynamic nature of the investment market.
National markets, including the capital market, have grown more reliant on global markets historically. Instances like international crises can have a direct impact on the Brazilian stock market.
The stock market is more attractive to investors when the political situation in a country is stable.
It is crucial to monitor political developments to understand how they affect your investment portfolio.
To enhance your understanding, we have selected this video for you to view!
It is important to assess the political situation before making investments.
Brazil’s increasing focus on investment and personal finance highlights the significance of examining the political landscape and its effects on the economy.
Investment analysis should extend beyond assessing the company you plan to invest in.
Investors are advised to analyze both local and global political situations to make secure investments, reduce economic risks, and increase profits while avoiding unnecessary losses.
We will begin by comprehending the functioning of monetary policy and its impact on investment choices.
How do your investments impact monetary policy?
Monetary policy is the macroeconomic strategy set by the Central Bank, a federal institution that determines interest rates through its internal departments.
Monetary policy manages the currency supply, interest rates, and works with demand to achieve economic goals like inflation and unemployment.
Monetary policy has the most significant impact on investment choices and economic activity by managing the currency supply and credit within a country.
Hillbrecht (1999) outlines the goals of monetary policy as:
- Price stability;
- Interest rate stability.
- Financial system stability;
- High employment rate;
- Economic expansion.
- Exchange market stability
Finding the ideal balance is crucial in determining monetary policy. An interest rate that is too low may lead to higher inflation, whereas an excessively high Selic rate can hinder economic growth.
The connection between interest rates and investment
The Central Bank utilizes the interest rate to manage economic growth and keep inflation in line with government targets. The primary tool for this purpose is the Selic rate, currently set at 12.25% annually.
When the Selic rate is high, the cost of credit increases, leading to decreased consumption and investment, thereby helping to lower inflation. Conversely, when the Selic rate is lowered, credit costs decrease, stimulating spending and investment by consumers and businesses, thereby boosting the economy.
Changes in the Selic rate can influence foreign investors’ interest in Brazilian securities, as higher interest rates make public bonds more attractive, leading to an influx of foreign capital and potentially strengthening the country’s currency.
With the Selic rate currently standing at 12.25% annually, fixed income investments like Direct Treasury have grown more competitive compared to variable income options like stocks on B3. This situation prompts investors to shift some of their funds to fixed income assets due to their higher return predictability in a high-interest rate environment.
To gain a better understanding of this connection, we have singled out this video for you.
How does politics impact the stock market?
The Stock Exchange reflects the real economy of a country and predicts market responses to government choices. As confidence in the government grows and its actions gain investors’ trust, the Stock Exchange typically sees an increase.
If there is doubt about the country’s policies leading to a financial crisis, investors lose confidence and stock prices decrease.
Investors will exercise caution if expectations are negative, as there may be numerous challenges ahead.
A crisis in the stock market can lead to various economic and social issues in a country, as evidenced by global financial events.
The present situation shows this clearly. The forecast for 2020, made before the coronavirus outbreak, predicted economic growth in Brazil. Consequently, businesses would gain from the increase in GDP, leading to higher financial outcomes like revenue and earnings.
How does the political situation impact the value of the dollar?
The instability of the dollar is tied to the country’s unpredictable political environment. Essentially, the more doubt and uncertainty the market has about the government, the stronger the US dollar becomes.
When there is potential for political change, the Brazilian currency tends to strengthen in the market.
Investors lose confidence in Brazil’s economy and policies during a political crisis, leading them to move their resources to other markets.
These investors seek investments that provide the best returns while minimizing risks.
The fluctuations of the dollar impact not only investors but also the general population. Depending on how much the dollar increases, prices may rise overall, leading to inflation.
How the Brazilian currency is affected by the political environment
Many economists believe that elections in the United States influence the stock market, with electoral cycles being linked to market returns.
Financial markets typically experience a decline in the year following a presidential election, as suggested by the widely accepted “theory of the presidential election cycle.”
In Brazil, it was observed that in 2002, when the currency reached R $ 4, the election of Lula caused market uncertainties.
During a period of crisis in September 2018, the dollar reached a rate of R $ 4.20 close to the elections.
Elections, new policies, or policy news do not directly impact stock prices; however, the decisions of investors in response to such news can affect prices.
Investors will be influenced by the candidate’s stance on the economy and the policies they plan to enact if elected.
Politics will consistently impact the economy.
Politics impacts the economy and, as a result, influences investments. Recognizing this is crucial in emphasizing the need for investors to diversify their portfolios.
Investors should consider policy changes, such as elections, when forming opinions on the stock market and making investment decisions. It’s advisable to maintain a portion of funds in liquid assets to reduce investment risks.
If the global policy has a negative impact on the market, having available capital to invest when prices fall allows you to benefit from political uncertainty rather than suffer from it. Watch this video we have prepared to learn more.
Conclusion
Government policies have a direct impact on the economy and can influence investment choices by affecting factors like inflation, interest rates, and growth.
Investors who monitor political developments gain an edge as they can predict how these actions will impact the market. Choices like alterations in taxes, infrastructure spending, or tax revisions can influence industries and consequently the returns on different investments.
Understanding the political and economic environment is crucial for maximizing investments. Being aware of political events and their impact on the economy is key to developing a more effective strategy.
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