Jose Artur Fortunato (English)

The comfort of stagnation

Jose Artur Fortunato — Tue, 29 Sep 2026 12:00:00 GMT

Polarization, revealed preference and the absence of a national project

On the eve of the 2026 election, Brazilian voters seem to be saying two things at once. In opinion polls, they declare themselves dissatisfied: in April this year, 68% said the country was heading in the wrong direction.[^1] At the ballot box, however, they reaffirm the same old choice, split between two poles: supporters of President Lula and supporters of the Bolsonaro family. This essay is about that contradiction, and it argues that it is not an accident but the key to understanding the country.

Economics has long distinguished between stated preferences and revealed preferences. The first are what people say they want; the second, what their choices actually show. When the two diverge, it is prudent to give more weight to the second. Applied to Brazilian politics, the concept produces an uncomfortable diagnosis: Brazilians say they want change, but their votes reveal a preference for permanence.

The numbers support this reading. A BTG/Nexus survey from August 2026 classifies 25% of the electorate as committed Lula supporters and 30% as committed Bolsonaro supporters.[^2] More than half the country has made up its mind before the campaign even begins. Brazil's two-round system should, in theory, free voters to back alternatives in the first round. Even so, the vote concentrates: in the Datafolha poll released on September 24, the two leading candidates together held 76% of first-round voting intentions.[^3]

It pays, however, to be exact. The vote does not reveal that voters are satisfied with the country. It reveals that the fear of the other side winning weighs more than the desire for change. The practical result is the same: each pole gives the other its reason to exist, and the equilibrium holds.

One might object that voters stick with the poles for lack of viable alternatives, not out of attachment to permanence. That objection, however, describes the problem rather than refuting it. What it points to is a coordination failure: a candidacy's viability is not given in advance; it is built precisely by the votes it receives. Voters who wait for an alternative to become viable before supporting it guarantee that it never will. With two rounds, the cost of coordinating in the first one is low, and yet coordination does not happen. In that sense, the absence of options does not refute the revealed preference. It is one of its consequences.

The same pattern repeats outside the ballot box. Over the past decade, Brazil has passed significant reforms under governments of opposite orientations: a constitutional spending cap, pension reform and tax reform. In almost all of them, however, the original impulse was diluted or reversed. The spending cap was abandoned a few years after it was created, and the tax reform came out full of special regimes won by organized sectors. Reform is accepted in principle, as long as its cost falls on someone else.

The results reflect that choice. GDP per capita took eleven years to surpass its 2013 peak, which only happened in 2024.[^4] The investment rate, at 16.8% of GDP in 2025,[^5] remains below the world average of close to 27%, and far from the more than 30% that South Korea sustained for decades.[^6] The high interest rates that hold back that investment, in turn, reflect a public debt that neither side is willing to contain. This is not collapse, but accommodation. The developmental ambition of the twentieth century has given way to a logic of preserving benefits, special regimes and structures won over decades.

Development, however, requires sacrifice. Its costs are immediate and concentrated; its benefits diffuse and in the future. No government can impose it alone: it is a collective decision, one that requires accepting unpleasant consequences in the short term.

A national project, in that sense, does not need to be complicated. It would start with a credible fiscal rule that stabilizes the debt and makes room for lower interest rates; lower rates unlock investment, today the main constraint on growth. It would require revisiting the special regimes and sectoral benefits accumulated over decades, and focusing public effort on what raises productivity: basic education, infrastructure and a simpler business environment. None of this is new. The difficulty has never been knowing what to do, but accepting who pays the bill.

History shows that societies rarely make this decision on their own initiative; it is usually forced by a crisis. Israel stabilized its currency in 1985, with inflation above 400% a year; Poland adopted the Balcerowicz Plan in 1990, after the collapse of its planned economy; Peru and India reformed in the early 1990s, facing hyperinflation and a balance-of-payments crisis, respectively. More recently, Javier Milei's Argentina began its adjustment after decades of chronic inflation. Even apparent exceptions, such as Paul Volcker's monetary discipline in the United States or Ireland's 1987 social pact, responded to situations that had already become unsustainable; the difference was acting before the collapse. The most lasting transformations, unlike those imposed through concentrated power, were the ones society accepted democratically, because it understood their benefit.

Brazil itself knows this path. The Real Plan of 1994 demanded discipline and patience from a population exhausted by inflation, and it worked, because the cost of doing nothing had become visible to everyone. Today that cost exists, but it is diffuse. It does not show up in a monthly index; it shows up in modest growth, low investment and generations that prosper less than they could.

Hence the dilemma. If society does not decide to change while the choice is still in its hands, the decision will likely end up being made by circumstances, under far less favorable conditions. History suggests that is the more common path. It does not have to be ours. In 2026, voters have the chance to align what they declare with what they reveal, and the vote can stop being a choice between sides and become a statement about which country we want to build.

[^1]: Ipsos, What Worries the World, Brazil report, April 2026. [^2]: BTG Pactual/Nexus, 2026 Election Survey, round of August 24, 2026. [^3]: Datafolha, presidential voting-intention poll released on September 24, 2026. [^4]: FGV IBRE, National Accounts Unit, estimates of GDP per capita at constant prices, 2024. [^5]: IBGE, Quarterly National Accounts, release of March 3, 2026. [^6]: International Monetary Fund, World Economic Outlook, gross fixed capital formation series.

AI and travel: ChatGPT as my professor in Japan

Jose Artur Fortunato — Mon, 30 Dec 2024 12:35:29 GMT

Kyoto, Kinkaku-ji, December 16, 2024

All my life I have been the curious type.
Question on question would go ignored.
Adults grew weary, their patience worn thin,
Treating my wonder like some sort of sin.

The experiment

From December 9 to 24, 2024, I traveled through Japan with an unusual companion. Instead of relying only on Google to satisfy my curiosity, I used ChatGPT as a kind of personal professor, asking the questions that came up naturally while visiting temples, riding trains and watching the rhythm of each city.

A search engine struggles with specific, context-driven questions. So at night, back at the hotel, I reflected on the day and turned to ChatGPT for explanations, comparisons and background. Over two weeks that added up to 35 questions, from etiquette to economics to 19th-century politics.

The result was an enlightening way to travel. It was also a useful test of what today's AI does well, and where it still needs a skeptical user.

Manners you notice on the first day

The first questions were the obvious ones for a visitor. Almost nobody eats while walking in Japan, and public trash bins are rare. Can you eat in public, and if so, why do people avoid it?

The answer was practical and, as far as I could check on the street, accurate. Eating is fine in parks, at festivals, in the seating areas of convenience stores and on the Shinkansen, where buying a bento box for the journey is part of the experience. It is frowned upon on commuter trains and while walking through crowds. The reasons go beyond hygiene: shared space is treated as shared, you carry your own trash home, and the idea of omoiyari, being mindful of how your actions affect others, shapes a lot of everyday behavior.

The same pattern showed up at temples and shrines. Most Japanese people do not describe themselves as religious, yet they bow and clap at shrines as a matter of course. Shinto and Buddhism coexist rather than compete, and the rituals work more as custom than as statements of faith.

A country without pickpockets

Tokyo feels remarkably safe, so I asked why pickpocketing is so rare. ChatGPT produced a long list: shame and social pressure, low inequality, a visible and trusted police force, a strong lost-and-found culture, surveillance and social stability.

Every item is plausible. That is exactly the problem with this kind of answer. As an economist, I wanted to know which factors matter most, and a list of ten plausible causes does not tell you that. AI is very good at producing a complete-looking answer. It is much weaker at weighing evidence, unless you explicitly ask it to.

Tokyo versus Kyoto, and the value of pushing back

The most interesting thread started with a simple question about the cultural differences between Tokyo and Kyoto. Kyoto was the imperial capital for more than a thousand years, from 794 to 1868, and it built its identity around the court, temples and refinement. Tokyo, formerly Edo, became the seat of the Tokugawa shogunate in 1603 and grew as a city of commerce, administration and later modernization.

From there I pushed further. Which other countries have a similar pair of cities? How do such pairs compare on GDP per capita, inequality and happiness? Is GDP even a reasonable proxy for happiness, and which data would be granular enough to compare cities?

Then I asked a simple one: how many tourists do Tokyo and Kyoto receive each year? The first answer compared Tokyo's international visitors with Kyoto's total visitors, domestic and international combined. I asked for an apples-to-apples comparison. The second answer fixed that for international visitors, but when I asked for domestic visitors, Kyoto's 2019 figure jumped from 53 million total visitors in the first answer to 88 million domestic visitors in the third. Both numbers cannot be right. Several of the cited sources were also low-quality aggregator sites rather than official statistics.

The same happened elsewhere. ChatGPT's table of foreign arrivals in Japan put 2023 at 21.1 million. The Japan National Tourism Organization's official figure is about 25 million, and 2024 went on to set a record of almost 37 million.

None of this made the experiment less valuable. It made the lesson clearer: the answers improved every time I challenged a definition or asked for like-for-like data, and they were least reliable exactly where they sounded most precise.

Following the thread of history

Where ChatGPT really shone was in chains of follow-up questions, the kind a patient teacher would answer. One evening started with England's role in the opium trade and the Meiji Restoration and ended seven questions later somewhere I never expected:

Was the restoration peaceful? Not entirely: it came with a civil war, the Boshin War of 1868 and 1869.
What happened to the samurai? Before 1868 there were close to two million people in samurai households, around 6% of the population. Within a decade their rice stipends were converted into government bonds and, in 1876, the Haitōrei edict banned them from carrying swords in public.
If the emperor existed under the Tokugawa, why did he have no power, and why did the Satsuma and Chōshū domains decide to back him against the shogunate?

Another evening, after walking through Tokyo, I asked how much of the city was destroyed in World War II. The answer led to the firebombing of March 9 and 10, 1945, when around 300 B-29 bombers set the wooden neighborhoods of eastern Tokyo on fire. Estimates of the dead range from 80,000 to 100,000 in a single night, making it the deadliest single air raid in history. Standing in a rebuilt city that shows almost no trace of it, that number stays with you.

What worked, and what did not

What worked:

Context questions. "Why do people do this?" is where AI beats a search engine by far.
Follow-ups. Being able to ask "and then what happened?" six times in a row turned tourist curiosity into genuine understanding.
A routine. Asking at night, after the day's experiences, gave the questions a purpose and the answers a place to land.

What did not:

Numbers. Statistics were the weakest part: inconsistent between answers, sometimes outdated, and often backed by weak sources.
Lists instead of judgment. Many answers were long, generic lists of plausible factors with no sense of which ones matter.
Overconfidence. Precise-sounding details came with the same confidence whether they were right or not.

How I would do it next time

I would do it again, with a few rules:

Use AI for the "why", and check the "how many" against official sources.
Define the comparison upfront: same year, same definition, same units.
Ask it to rank causes and say how confident it is, not just to list them.
Ask for primary sources, and treat an answer without them as a starting point, not a fact.

Used this way, an AI assistant is a remarkable travel companion. Just not one you should believe without asking a second question.

This essay replaces the original two-part post from December 2024, which published the full transcript of the conversations. Revised in September 2026.

Hard landing or black swan? FED, inflation, and economic downturn.

Jose Artur Fortunato — Mon, 30 May 2022 14:41:37 GMT

Revisited in September 2026: This call turned out wrong. US inflation peaked at 9.1% in June 2022, and the Fed kept raising rates until mid-2023, to 5.25-5.50%. Yet the economy avoided a recession: inflation was back to around 3% a year later, while unemployment stayed low. Part of the argument held up, since falling energy prices did much of the early disinflation work. But the soft landing I compared to landing a plane on the Hudson is roughly what happened.

The world is facing rising inflation. Despite years of undershooting inflationary targets, countries are now dealing with inflation, and it is currently up to the central banks to correct course. In its toolkit, central banks worldwide have various ways of trying to control inflation, with the most effective and well-known being short-term interest rates. In recent months the Federal Reserve (FED) has been raising short-term rates in an attempt to increase rates all around the economy, therefore disincentivizing investment. Less investment means less demand, which should bring inflation down. Won't it?

Decreased investment and inflation

Inflation is always a price rise, which does not mean all inflationary pressures are equal. To name a few, inflationary pressures may stem from a rise in costs of production, shifts in demand, shifts in supply, loss of confidence in the currency, and excessive demand. When the FED raises interest rates to contain inflation, it is signaling that it is doing everything in its power to fulfill its mandate of maintaining “low and stable inflation,” and second, tackling the problem identified as excessive demand. There being excessive demand, raising rates will rapidly cut borrowing and guarantee a quick return to normalcy. Otherwise, increasing rates will only pose a barrier for new investments, decrease overall spending and manufacture a recession.

Pressure points for inflation

The main index used for measuring inflation in the United States is the Consumer Price Index (CPI), which sits at 8.3% (12 months), well above the FED's target of 2%. We have three broad categories within the CPI with different weights in the index: Food representing 14.3%, energy representing 7.3%, and all items less food and energy representing the remaining 79.3%. In the graph below, we can notice that energy is the category to have suffered the highest increase in prices in the last 12 months. This data might be misleading simply because energy represents only 7.3% of the whole CPI, so we have to look at how much each category contributed to the overall increase of the index.

With the weighted contribution of each category, the relevance of the increase in energy prices becomes even more pronounced. Representing only 7.3% of the whole index, its contribution to overall inflation is over 27%.

Digging deeper into the energy category, we find that energy commodities rose 44.7% in price, with fuel oil increasing by 80.5% and gasoline by 43.6%. In energy services, there was an increase of 13.7%, with electricity increasing by 11% and natural gas by 22.7%. Whenever we talk about inflation in energy prices, we must consider the secondary effects on the economy. At first, a rise in energy prices might not lead to outright inflation in every sector. However, with enough time, cost increases through transportation and electricity, which inevitably impact all sectors. Energy prices are so important for that reason, even more so when they directly represent 27% of the current rise in prices.

Soft(ish) landing?

What most economic commentators are currently speculating on is the FED's capacity to turn inflation into a soft landing (which is already turning softish). A soft landing means a decrease in inflation without a severe economic downturn. To accomplish a soft landing, the FED is raising short-term rates. Raising rates to fight an increase in energy and food prices. Maybe if we raise rates enough people will stop using energy and eating. Expecting a softish landing in current conditions is like landing a plane in the Hudson River, a true black swan.

Containing inflation

Even though the FED's strategy is unlikely to work in the short term, we can expect it to decrease inflation over a more extended period. With higher rates, we will see less demand overall since investment will fall, jobs will perish, and maybe then, people will stop eating. Unless the federal government takes action, what is being referred to as a softish landing will most likely look like a hard landing and, I would dare say, a social and economic disaster.

Fighting back

Fighting inflation should be a shared responsibility, meaning we should not count solely on the FED to do it. The FED can truly fight inflation when the economy is overheating, but not necessarily when we have supply chain imbalances. The Federal Government must use all its resources to fight inflation, as it is one of the most damaging phenomena to a society. Inflation impacts the vulnerable first and foremost, eating away their purchasing power. When someone who could barely make ends meet must spend more on food and energy, they are likely to be unable to satisfy their most basic needs. As counterintuitive as it may sound, sometimes fighting inflation might mean spending more on subsidies and investment in strategic sectors.

Layer 2, the Ethereum savior or killer?

Jose Artur Fortunato — Mon, 17 Jan 2022 19:28:54 GMT

Ethereum is the second-largest cryptocurrency in circulation and focuses on enabling the creation of smart contracts. Though Ethereum’s rise in price was the dream of most holders, its unseen consequence to the network was that it skyrocketed transaction prices. In simple terms, the transaction fee is determined by (gas consumed * gas price), and, for a simple transaction, the amount of gas consumed is always 21,000 while the gas price is around 20. Those numbers are denominated in gwei or one-billionth of an Ethereum (0.000000001 eth). Considering Ethereum is priced at $3,000, we have a “basic fee” of $1.26 per transaction, a value that is usually closer to $40 for most transactions.

Ethereum derives its utility from the possibility of being used as a foundation for smart contracts and dApps being the first Turing complete blockchain. With the maintenance of prohibitive transaction prices within the network, a myriad of competitors appeared, delivering lower transaction fees and quicker execution times. Among those are Solana ($SOL), Cardano ($ADA), and Polkadot ($DOT). Though switching to another blockchain that offers lower transaction fees and quicker execution times might be the intuitive answer to the problems Ethereum is facing, we have to consider the economic costs of doing so. For developers within the Ethereum network, switching would mean starting from scratch. Rewriting the dApp from scratch poses itself as an insurmountable challenge that would be too costly and time-consuming for most enterprises to endeavor.

To solve the problem of high transaction costs, the Ethereum Foundation has promised an update known as Ethereum 2.0, which implements proof of stake and sharding. The update to Ethereum 2.0 had its launch delayed for the fourth consecutive time in December 2021, pushing it to summer 2022. With the uncertainty looming over the timing of the update, new developers have increasingly opted for other networks to elaborate their projects on, and switching networks after the beginning of a project is a definite no-no. This does not immediately impact Ethereum’s market cap dominance, but as the projects grow, communities strengthen, and competitor blockchains access network effects, the delays might leave a definite scar. The graph below shows how the price of Ethereum and the number of active addresses have decoupled for the first time since 2016. Taking Metcalfe’s law, which states that the value of a network is proportional to the square of the number of nodes in a network, we could be led to believe that the price of Ethereum grew without solid foundations, showing its first signs of weakness in years.

Ethereum: Number of active addresses and price in log

Source: Glassnode

Date: 09/01/2022

Community solution

High transaction costs and continuous delays in the implementation of Ethereum 2.0 pose a threat to all participants of the Ethereum network. The community itself understood the Ethereum Foundation was lagging in implementing a solution and took matters into their own hands, looking for alternatives to make the Ethereum network cheaper. It was in this scenario that we saw the creation and rise of Ethereum layer 2 solutions. Ethereum layer 2s are blockchains that work on top of another blockchain, in this case, the Ethereum blockchain. This means that transactions that happen within layer 2 are first recorded only within the layer 2 blockchain, which then summarizes (bundles) all transactions that occurred within a specified time, and, with a single transaction, adds them all to the main chain (layer 1). In an almost excessive simplification, by adding grouped transactions to layer 1, layer 2 can process transactions at incredible speeds with low costs. Layer 2 solutions have gained traction recently and now have over $20 billion market cap, with Polygon ($MATIC) leading the way and about $3 billion in total value locked, with Arbitrum leading the way. The graph below shows how the Market Cap of the leading Ethereum layer 2s performed against Ethereum itself last year. Between January and May and after December 10, we can see a sharp decoupling. Note that, despite the similar graph movement, the market cap of leading Ethereum layer 2 solutions increased 6.7-fold while Ethereum increased only 2.5-fold since last year.

Comparison of Ethereum’s market cap and leading Ethereum layer 2s in logarithmic scale.

Source: CoinMarketCap

Date: 09/01/2022

Layer 2 impact on Ethereum itself

There are two almost opposite ways of looking at how layer 2 solutions impact Ethereum. First and foremost, layer 2 solutions can be considered to resolve the devastating bottleneck created by transaction prices while also enabling greater scalability and processing speeds. This view relies on layer 2 as a complementary mechanism to Ethereum’s utility, leaving the main network as a means of security while the second layer performs thousands of transactions per second. The opposite view of layer 2 solutions states that these solutions are fragmenting the network and “stealing value” from Ethereum. Investment and development that would otherwise go into Ethereum are going into layer 2 solutions, growing the ecosystem to the detriment of the main chain, and creating intrachain competition.

The unanswered question that remains is: what does that imply for Ethereum? As stated in the beginning, assuming Ethereum derives its value from utility and its utility is based on the number of wallets and/or transactions within the network, with the implementation of layer 2 solutions, Ethereum should see a stark decrease in transactions and, therefore, value. The reduction of transactions derives from the possibility of layer 2 solutions to process thousands of transactions before submitting a single summarized transaction to the main chain. In a hypothetical scenario where a layer 2 bundles 20 thousand transactions (they can bundle up to 80 thousand) into a single Ethereum transaction, there would have to be an exponential increase in adoption of layer 2 solutions for Ethereum to maintain its current transaction rate. With the decrease in transactions, Ethereum’s utility diminishes and, therefore, also should price. So, I would dare say, Layer 2 solutions are Ethereum’s savior because they will allow Ethereum to prosper despite its repeated failure to upgrade and solve its problems. But, with the adoption of Layer 2 solutions, Ethereum should see a stark decrease in the number of transactions and, as a consequence, price. This will happen as Ethereum’s main function rotates from the development of dApps and smart contracts, which submit thousands of transactions, to being the backbone of other platforms, which submit few bundled transactions.

The economics of solar in Brazil

Jose Artur Fortunato — Fri, 12 Mar 2021 13:03:25 GMT

Panorama:

Brazil is a unique country to live in. From its receptive people to its abundant natural resources, the country enjoys tremendous growth and diversity opportunities. One aspect that makes Brazil even more singular is the composition of its energy matrix. Despite an above-average dependence on petroleum and its derivatives, almost 45% of its energy comes from renewable sources (exhibit 1, 2). Its relative use of coal and natural gas is minor, while the relative use of sugar cane derivatives and hydraulics is multiple times above-average (BEN, 2021).

Exhibit 1: Brazilian energy matrix in 2019

Exhibit 2: World energy matrix in 2018

The country's electricity usage depends predominantly on hydropower, and 83% of all its electricity generated comes from renewable sources (Exhibit 3). Solar still plays a minor role, representing only 1% of all electricity generated in the country, but has grown significantly in recent years (Exhibit 4). In 2015 Brazil generated only 59 GWh of solar electricity, while in 2019, it generated 6,655 GWh, a 112-fold increase (IEA, 2021).

Exhibit 3: Brazilian electricity matrix in 2019

Exhibit 4: Brazilian solar electricity generation in GWh

In 2018 the world used 3.3 MWh of electricity per capita while Brazil used only 2.6 MWh. Compared with developed nations, Brazil's per capita electricity usage is still substantially inferior. An increase in energy usage should be expected in the near term if catching up is anticipated (IEA, 2021).

Brazil's electricity consumption totaled 513,754 GWh in 2019, putting the country in 6th position worldwide. China, which is the country that consumes the most electricity yearly, used 7,255,500 GWh, almost 14 times as much as Brazil did. Regarding each sector's electricity consumption in Brazil, the industrial sector consumes 38% of all energy generated, while residential, commercial, and public services consume around 27% each, agriculture 6%, and transport less than 1%, as seen in table 1 (IEA, 2021).

Table 1: Consumption of electricity in Brazil by sector in megawatt-hours.

Brazil is blessed with one of the greatest hydropower potentials in the world. At one point, electricity generation from hydroelectric was responsible for almost two-thirds of the country's production of electricity. Only around one-third of Brazilian hydroelectric potential is fully exploited. The greatest undeveloped hydroelectric generation potential is in northern Brazil, but new projects face resistance due to socio-environmental concerns (Deloitte, 2018).

The resistance to new hydroelectric construction combined with the government's financial restraints due to the ongoing crisis will probably push towards a quicker than expected solar power adoption. Increased efficiency and private implementation as costs become more accessible will also be driving forces for a swift adoption of this technology in the upcoming years.

Solar:

Humans have been exploring ways to harness energy from the sun since the beginning of mankind. Using mirrors to redirect and concentrate solar energy was the most common form of exploiting this resource until the 18th century. From there on, more intricate ideas arose as scientists searched for more effective ways to utilize the sun to generate usable energy.

The development of solar panel technology (photovoltaic panels) took several contributions from various scientists. It is still unsettled who exactly created the technology but most credit the French scientist Edmond Becquerel for the discovery of the photovoltaic (PV) effect – the ability to generate electricity from sunlight. In 1839 Becquerel successfully created an electrical current by submersing two gold and platinum plates in a conducting solution and exposing them to sunlight. Modern solar cells, however, work through a p-n junction (diode), discovered much later, in 1940, by Russell Ohl at Bell Labs. In this junction, with the help of energy from the photons the sun emits, electrons in each atom jump to a higher energy state. Their excited state creates a conduction band in the p-n junction that allows electrons to move freely in a predetermined direction, thus generating an electrical current.

With Becquerel’s brilliant discovery, scientists worldwide started exploring ways to improve and utilize energy for general purposes. A series of patents were filed to secure the rights to the invention of “solar sensitive devices”, but it was not until 1954 that Bell Labs created a practical silicon photovoltaic cell. Bell Labs’ invention was the first solar cell made from silicon, the predominant material in solar panels to this day, to power an electric device for several hours.

Composition:

Solar panels are composed of relatively few and abundant materials. First of all, we have silicon solar cells (A), the component responsible for absorbing light. Silicon is the semiconductor material used in 95% of solar modules today and is the second most abundant element on the planet, after oxygen (NREL, 2016). The silicon solar cells are responsible for around 60% of the costs associated with solar panels' production. Connecting all silicon cells is the cell stringing ribbon (B), a solder-coated oxygen-free high conductivity copper ribbon. Next, we have the junction box (C). The junction box keeps power flowing in one direction and prevents it from feeding back into the panel. If a part of the solar panel is shaded, that string will want to consume power, reversing electricity flow. Diodes inside the junction box prevent that from happening.

Exhibit 5: Overview of crystalline-silicon module components adapted from NREL 2016.

The backsheet (D) is a crucial polymeric material that adheres to the panel's backside to provide electrical insulation and protection against outside forces such as moisture and UV light. Secondhand backsheets have been known to accelerate the degradation of panels significantly. The string connector ribbons (E) are nothing but a wider (5 mm against 2 mm) stringing ribbon which connects all string ribbons (B). Next, we have the edge seal (F) acting as a seal against moisture. Moisture is one of the solar panels' biggest enemies as it causes poor performance and premature failure, so a high-quality edge seal is essential. Then comes the aluminum frame (G). This frame is responsible for holding all components in place. The front glass (H) also acts as a seal to the panel while permitting the photons to reach the PV panels and chain the electric generating reaction. Last, we have the encapsulant (I), usually ethylene vinyl acetate (EVA). EVA comes in thin sheets inserted between the solar cells and the top surface and the rear surface to provide adhesion between the solar cells.

Understanding the components of a solar cell, it is vital to evaluate the evolution of costs associated with its production. In Exhibit 6, we can see the process starts with polysilicon production, which must then be transformed into ingots and then wafers. After that, ingots and wafers are converted into individual cells, which will later be assembled into a module.

Analyzing the costs involved in each of these processes, we can see a significant reduction in every step. The biggest relative decrease in price happened in the first two processes (48% and 62%), while module assembly had the smallest drop (36%). The total price drop was from US$ 0.638 in 2014-15 to US$ 0.346 in Q1 2017 per Watt, a whopping 45% in two years.

Exhibit 6: Bottom-up manufacturing cost model results for the full crystalline-silicon module supply chain from 2014/15 to Q1 2017. The results shown are for manufacturing PERC and modules in Southeast Asia (NREL, 2017).

Costs associated with the effective installation of a PV panel go way beyond the panel. In exhibit 7, we can see the solar module accounts for only 12% of the value consumers pay, while several other “hard” and “soft” costs account for the other 88%. The only cost higher than the module is the supply chain cost, but all values get diluted due to the sheer number of variables involved.

Exhibit 7: Distribution of costs for implementing solar in the US (NREL, 2017).

Potential:

Various factors play a central role when analyzing the generation of solar energy in a country. First and foremost is the country's geographic position. This determines one of the most important factors in solar energy generation, the sun's incidence. The Brazilian potential for generating solar energy considering its geographic position is astonishing, mainly because of the latitude the country is situated in. Being divided by the equator ensures the country has constant and ample sunlight incidence during the whole year. According to the Brazilian Atlas of Solar Energy, the country receives, during the year, more than three thousand hours of sunlight a year, corresponding to 4.5 to 6.3 thousand Wh/m^2.

Exhibit 8: Comparison between the sun’s incidence in Brazil and Europe in Wh/m^2.

For comparison's sake, Germany, in its region with the highest solar potential, receives approximately 40% less sunlight than Brazil. Yet, Brazil only produces 6,655 GWh while Germany produces 47,517 GWh, almost 8 times more than the former. Climate also favors Brazil as the country does not see snowfall, a considerable nuisance in colder countries for the generation of solar energy. Where the sun's incidence is highest, the country has a desert-like biome (IBGE, 2021). This biome favors solar energy generation because of the very few clouds and improbable shadows (from trees, leaves, among others).

The distribution of the installed 6,655 GWh Brazil generates yearly in solar electricity has 39% going to homes, 38% going to businesses, 13% to rural areas, and only 9% to industrial enterprises (Exhibit 9). Knowing the industrial sector uses almost 38% of all electricity generated in Brazil allows us to infer its adoption of solar is below expected. We have to recognize that the sole reliance on solar is not an alternative for many industries. However, its incorporation as an investment aiming to reduce costs with electricity is viable and valuable.

Exhibit 9: Consumption of solar by class.

With the dipping prices of PV panels and all other hardware involved in the generation of solar energy, soft costs take an increasing share of value. In 2010 soft costs represented around 50% of the value while in 2017, they represented almost 70% of the value, an increase of almost three percentage points per year (Exhibit 10). An increase in the proportion of soft costs benefits the growth potential of solar panels in Brazil because they leave a smaller portion of value subject to the exchange rate. The country is known to have a volatile exchange rate and has seen a 40% decrease in its currency’s value in dollars between 2010 and 2017 (Trading Economics). In the last year alone, with the downturn in interest rates, the currency has devalued almost 15%, a decisive factor for imported goods' cost.

Exhibit 10: Evolution of the costs of solar energy per watt in the US.

Speaking of interest rates, the downturn that took the Brazilian interest rate from over 14% in 2015 to its current rate of 1.90% vastly promotes solar panels' implementation. The viability of solar projects is exceptionally reliant on interest rates because of the project's long duration. Even if the long-term cost of utilizing solar energy is inferior to the grid's energy consumption, those values must be discounted by the interest rate and brought to present value through the discounted cash flow (DCF) method. Since interest rates and present value are inversely proportional, the higher the interest rates, the lower the project's expected value (maybe even a negative expected value) and the longer the payback time.

To offset the 15% devaluation of the Brazilian exchange rate, the government sanctioned a bill to remove all import taxes from solar panels. Until 2020 the equipment was subject to 14% in taxes upon arrival.

Today in Brazil, as a customer or company, there are at least 60 alternatives of possible financing. Those come from various sources, ranging from public institutions (National Bank of Economic Development – BNDES, among others) with subsidies to private financing from the various institutions available. The repayment term varies from 5 years up to 24 years, both with a fixed-rate amortization schedule. This allows excellent opportunity through the demand side, incentivizing companies to explore opportunities in the sector (ABSOLAR, 2021).

Taking a look at the supply side, there are 93 companies registered with FINAME and BNDES that work with PV panels. Sixty-four of those sell "ready to go" solar kits, while the rest sell either the solar modules or other individual parts like the inverter, junction box, among others (ABSOLAR, 2021).

Effectively looking at costs for the generation of solar energy in Brazil, those have, following the global trend, fallen considerably in the last few years. In exhibit 11, we can see that the USD per MWh cost in 2013 was just over $100 and went down to around $20 in 2019. Despite the massive devaluation the Brazilian Real suffered during this period, costs still decreased by around 80% in dollar terms, emphasizing the increasing economic viability of implementing solar in Brazil (ABSOLAR, 2019).

Exhibit 11: Evolution of prices in USD per MWh

Now we must compare the cost of solar electricity with electricity from the grid to ensure its economic viability. For this analysis, we will consider the state of São Paulo, the most populous state in Brazil, because it is also the second-biggest producer of solar energy in the country and has widely available information regarding costs. The tariff charged per kWh by CPFL Paulista for homes is R$ 0.85. According to the Energy Research Company (EPE), the average electricity consumption for homes in the state of São Paulo was 172 kWh/month. Through a simple multiplication, we can assume the average electricity bill in the state was R$ 146.20. A solar kit capable of generating 216 kWh/month of energy costs R$ 6,200 (Neosolar). Using the DCF method and discounting at a 1.9% rate, this investment's payback time is 43 months and 26 days, or 3 years, 7 months, and 26 days. The net present value (NPV) for 10 years is R$ 8,429.73. To reinforce the importance of interest rates in long-duration projects, we will assume a 6% discount rate. In this scenario, the NPV for 10 years is R$ 4,190.32.

Conclusion

The generation of electricity through solar panels in Brazil is an up-and-coming market. The country has various factors favoring the widespread implementation of this technology. First, there is the incidence of sun and favorable climate. Both are essential for the widespread adoption of panels. The country still has a sectoral distribution of adoption, which is quite different from what one would expect. This is an important aspect that leads us to believe there is still a wide array of possibilities for implementation. We must also consider the global trend of prices. Soft costs are taking an increasingly large proportion of costs due to economies of scale in the production methods. This allows countries with an unstable currency, such as Brazil, to be less affected by devaluations as soft costs take an increasingly large share of the price. The timing for widespread adoption is also favorable as hydroelectric, the country's primary energy source, faces socio-economic resistance. With interest rates at an all-time low, the macroeconomic scenario allows long-duration projects to become viable. Import taxes have always been problematic and prohibitive for many Brazilian sectors, but they are currently null for solar panels and related technology, favoring adoption. Customer and corporate financing are at their peak, with more than 60 options available. Most importantly, when considering all variables of the project, the implementation of solar panels in homes has a significantly positive net present value (NPV), ensuring economic viability for individuals.

References:

Tenda (TEND3) Research report

Jose Artur Fortunato — Fri, 11 Dec 2020 08:30:19 GMT

Revisited in September 2026: Our BUY call was wrong on timing and underestimated the main risk we listed. Construction-cost inflation hit Tenda hard in 2021: the company reported a net loss of R$ 268 million in 4Q21, and in 2022 the shares fell to around R$ 6, instead of reaching our R$ 32.86 target by the end of 2021. The business thesis proved more durable: with the relaunch of Minha Casa, Minha Vida in 2023, the stock recovered, and it closed at R$ 28.52 on September 28, 2026.

This report was developed to encompass all business areas of the construction company Tenda, listed in the Brazilian B3 index. It includes a business description, industry overview, competitive positioning, financial analysis, valuation, risk analysis, and ESG positioning. Each area was thoroughly developed with the most recent and best available information found by our team.

Authors: Joao Viotto, Jose Artur Fortunato, Matheus Parra, Vitor Bressan.

Special thanks to our great Advisor, Maria Paula Cicogna.

Investment Highlight

We are initiating coverage on Tenda S.A. (TEND3) with a BUY recommendation and a YE21 target price of R$ 32.86 / share due to the attractive risk/return relation presented at the current moment. Our investment thesis is based on (i) best-in-class Minha Casa Minha Vida (MCMV) homebuilder, (ii) scalable business model and addressable market, (iii) solid and constant market share gain over the past years, and (iv) great potential to develop offsite construction in Brazil.

Full potential ahead

Tenda's ability to increase launches, sales, revenues, and market share for the last years was impressive. The management is aligned with the Company's long-term goals. Few SKUs allow a high level of specialization and continuous improvement, at significantly lower than average prices, suitable for the mid-low income population (Tenda's target audience). At the same time, the Brazilian housing deficit is enormous. To summarize, Tenda is one of the most efficient homebuilders in the country and is ready to keep increasing its share; however, Tenda's restriction is not placed on the demand side but in its business model, which requires at least 1,000 launches per year in a region to be viable. The necessity of sizeable local scale in a continental country such as Brazil restricts Tenda's operations to large cities and metropolitan areas, leaving a large part of the market share to local small and inefficient players in the countryside. As both Tenda's restriction and quality are already known, its stock price reflects this potential, although there is still an upside in the mid-term and opportunity to realize gains along with Tenda's growth.

Lifetime opportunity

The offsite construction would be a game-changer for the sector since putting elements of civil and production engineering together could increase productivity, reduce the costs, and allow Tenda to operate in the countryside, expanding its addressable market. Due to Tenda's pioneering spirit, operational excellence, and target audience, we believe Tenda would be the player with the most excellent fit for this new business model in Brazil. However, the first trial is just being made, and we think the project must mature before incorporating it into our assumptions.

Valuation

As Tenda has been gaining market share by increasing its launches year after year, we built three scenarios in which Tenda reaches its full operational capability (around 31,000 launches) in different time frames, and our price range goes from R$ 27.2 in our bear case to R$ 34.3 in our bull case. For our base case, we stipulate a R$ 32.86 target price that incorporated Tenda's operational excellence in its business and took macroeconomic risks into consideration.

Major risks

Being 100% dependent on the MCMV, Tenda is highly exposed to changes in the financing programs from FGTS. Early this year, the Federal Government's economic team presented a proposal to reduce subsidies by almost 70% to R$ 3 billion, but given the negative response from the construction sector, the reduction will be made gradually with a R$ 500 million reduction per year. Even in a dramatic decrease in the FGTS funding capability, we believe Tenda would be able to increase its market share since they have a lean and efficient operation and one of the best prices in the market; however, Tenda's historic growth was backed by MCMV, and a keen reduction in the FGTS funding program would significantly decrease the Company's growth rates seen in the past.

Business Description

Tenda started its operations in 1969 from the foundation of the Company Tenda Engenharia e Comércio (having no ties with the current Company). In 2008 the Company underwent an incorporation process led by Gafisa SA, which aimed to expand into the popular housing sector. In 2011, Tenda instituted its own board of directors giving birth to the current Company.

Business model:

Tenda (TEND3) is a company that operates in the civil construction industry, being present in 9 Brazilian states. It is the only national Company focused entirely on the civil construction of mid-low housing by working alongside the Brazilian government in the housing programs: Minha Casa, Minha Vida (MCMV), and Casa Verde e Amarela (CVA).

The Company's business model is aimed at the population with an income between R$ 1,800 and R$ 4,000 (represented by the 1.5 and 2 income ranges of the MCMV and CVA programs). According to data presented by the Brazilian Institute of Geography and Statistics (IBGE) in 2019, the Company's operating ranges represent approximately 30% of the Brazilian population.

Tenda's consumers have an average income of R$2,432, which is 2.3 times the Brazilian minimum wage of February 2020. The average salary of the Company's consumers is very close to the overall average Brazilian salary, which, in 2019, was R$ 2,308, according to the IBGE.

Products portfolio (images 1 and 2):

The units offered by Tenda are standardized, with 40m² and two bedrooms.

There are three types of Stock Keeping Units (SKU): (i) ground floor + four floors, without elevator; (ii) ground floor + ten floors, with elevator; and (iii) ground floor + twenty floors, with elevator.

Competitive differentials:

The standard unit is built using aluminum molds. Even though aluminum molds are not the cheapest material for the construction industry, economies of scale are present due to the standardization and industrialization of molds. Compared to the masonry method commonly used in Brazil, aluminum molds reduce construction time and result in less material waste, leading to a lower total cost per construction. The reduction in the total cost of construction is also due to the lower use of labor enabled by the aluminum molds.

The average price per unit sold by Tenda is R$ 139,000, while the average cost of its competitors is R$ 174,000 (graphic 3). That is, Tenda sells its products 25.18% cheaper than its competitors.

•Minimalist construction: The use of aluminum molds allows Tenda to accomplish an extremely minimalist and standardized construction, allowing greater predictability of costs and lower building construction time when compared to other companies in the market.

•Fast construction: Tenda's unconventional civil construction method allows buildings to be completed in less time compared to traditional masonry. Tenda's average construction time is approximately 11 months, while its competitors take an average of 20 months on an equivalent construction, or a reduction of 55% in total construction time compared to competitors, which reduces the operational cycle of its working capital.

•Growth in launches: As a result of Tenda's competitive advantages, in the last five years, Tenda reached a compound annual growth rate (CAGR) of 20.76%, and an accumulated CAGR of 112.6% from 2015 to 2019. These figures show the Company's substantial increase in launches recently (Exhibit 4).

Suppliers:

The primary raw materials used in the construction of the units are aluminum molds and concrete. The molds' leading and only supplier is a foreign company. However, the molds are reusable and long-lasting. Concrete is a simple raw material that can be found anywhere at an accessible price in Brazil.

Concerning other raw material suppliers, as with concrete, Tenda has a diversified range of suppliers, mitigating the risk of a lack of products for its operations.

Market Share: (seen in exhibit 5)

Tenda currently focuses only on metropolitan regions because large cities have higher.

The Company's expansion strategy is to reach a new metropolitan region each year and consolidate its brand across the country. Another critical point for the Company's expansion is creating a new production method (offsite), which aims to revolutionize civil construction in the Brazilian market, allowing the Company to enter non-metropolitan regions.

Offsite construction - an innovative method that consists of producing precast units on an industrial scale and transporting them to their destination. Tenda seeks to employ new production technologies, reduce labor costs, bring more agility in the production of units, and reduce construction time. This will also grant cost savings throughout the operational cycle in a strategy that aims at increasing efficiency and the Market Share.

Market Share (MCMV): Tenda's construction represents 6.2% of all construction financed by MCMV (Exhibit 5), and 10% of the program within the nine regions where the company is present (Exhibit 6); this allows the company to lead the program in the metropolitan areas of Salvador (44%), Recife (22%), and Rio de Janeiro (20%).

Minha Casa, Minha Vida (MCMV) and Casa Verde e Amarela (CVA):

The Minha Casa, Minha Vida (MCMV) program was launched in 2009 to reduce Brazil's housing deficit. According to data from the National Research of Household Sample (PNAD), Brazil's housing deficit consisted of 7.7 million houses in 2017. MCMV is a housing program of the Brazilian Federal Government focused on the construction of mid-low income housing, which subsidizes properties for families with a monthly income of up to R$ 1,800 and facilitates the financing conditions of properties for families with income up to R$ 9,000. Since its creation, MCMV has already financed the construction of 4 million houses.

The Casa Verde e Amarela (CVA) housing program was launched in 2020, as a restructuring of part of the MCMV program, designed to offer differentiated financing conditions for the north and northeast regions of the country, where the housing deficit is more severe, and the population has a lower average income than the rest of Brazil. The CVA reduced interest rates for the people in the lowest income ranges: while the MCMV interest rate is equal to 5% per year for families with incomes up to R$ 2,000.00, the CVA offers interest rates between 4.25% and 5% for the same income brackets, as can be seen in the table below.

Industry Overview

The "new normal":

The world is currently going through an unprecedented state of affairs that has given rise to what we now call the "new normal." The "new normal" has become a reality that every sector has been obliged to deal with due to the COVID-19 sanitary crisis. This emergency comes as a game-changer for the way people, and companies, conduct their responsibilities. The Brazilian macroeconomic scenario has shifted towards unforeseen low-interest rates and high unemployment rates (Exhibit 7). All factors mentioned have had their toll on the construction sector as a whole.

Social distancing:

Returning just recently to some form of human interaction, the Brazilian economy suffered from almost four months of intense social distancing. This practice helped in dispersing COVID-19 cases through a longer timeline while damaging most businesses' ability to function correctly. The construction sector was not exempt from this impact as it faced the difficulty of selling houses without ever talking person to person with the client. Because of its early adherence to the digital revolution, Tenda had little problem ramping up the digital transformation and quickly adapted to online sales. In terms of gross sales, the Company sold R$ 941 million, its highest ever-recorded value for the January/June period. This reinforces the adaptive capabilities of the Company.

Inflation?:

For the last couple of years, Brazilian inflation has kept steady. In a revival of Brazilian

Inflation, the General Market Price Index (IGP-M) rose 17.9%, while the National Construction Cost Index (INCC) rose 5.3%, both on a year-over-year basis from September 2019 to September 2020. The IGP-M has reached its highest year-over-year point since 2003, as seen in Exhibit 8.

Chinese demand:

As Chinese iron ore production declined 4.6% year-over-year for the first quarter of 2020 due to the pandemic, its demand for Brazilian ore rose substantially (RESEARCHGATE, 2020). The 21.9% increase in Chinese demand for iron ore from January to September 2020 has contributed to the surge in prices, according to the Brazilian Ministry of Industry, Foreign Trade, and Services (MDIC).

Construction panorama:

Representing 3.18% of value-added to the gross domestic product (GDP), 7.57% of employed people in Brazil, and responsible for more than 50% of investments, the construction sector has a vital role in the national economy. Nevertheless, the Brazilian government plays a central part in the industry through its Minha Casa Minha Vida (MCMV) program, aiming to disseminate affordable housing and decrease the housing deficit. Since the program finances up to 80% of the property based on completion, access to credit is relatively ample. One concern with the program's financing during the pandemic is the use of the Seniority Guarantee Fund (FGTS). This is an obligatory saving account implemented by the federal government, so people have some money to withdraw in times of hardship. To mitigate damages caused by the COVID-19, the federal government released up to R$ 4,000 per person who fit the established criteria.

Brazilian housing deficit:

A study conducted by Joao Pinheiro Foundation (FJP) in 2015 asserted a housing deficit in Brazil of more than 6,356,000 houses. 80% of the urban deficit is concentrated in the Northeast, Southeast, and South regions of the country, three of Tenda's most vital regions, as seen in Exhibit 9. Another relevant piece of information for the construction of affordable housing in Brazil is the number of people coming of age in the next few years. Since the country still has a growing population, there should be a steady stream of people looking for homes apart from the already existing housing deficit. The housing deficit, allied to an increasing population and constant government financing, makes for a steady demand for enterprises.

Demographics:

According to research conducted by the Brazilian Association of Real Estate Developers (Abrainc), in association with the Getúlio Vargas Foundation (FGV), to meet the housing demand for the next ten years, Brazil would need to construct 1.2 million houses a year. Exhibit 10 shows us the housing deficit gap is widening. This data aligns with the Brazilian demographic trend of increasing population and the formation of new families. As for the industry, this guarantees demand is way above supply and shouldn't be a problem anytime soon, at least as long as financing is available.

Fragmented market:

The structure of the construction sector is quite peculiar, with highly fragmented market participants. According to the Brazilian Industry and Construction Chamber (CBIC), while there were nearly 200,000 companies in the civil construction sector, only 874 had 250 or more active employees. This means that at least 199 thousand companies thrive with a small number of employees, reinforcing the idea of a fragmented market. This can be understood by the few economies of scale and excessive demand generated by the housing gap, enabling small builders to be Tenda's direct competitors.

Suppliers:

Brazil is a well-positioned country for the construction sector because of its national suppliers of concrete, iron, and other essential primary products for the industry. At any other time, this allows suppliers to be extraordinarily decentralized and the risk of suppliers mitigated, but with the rise of exports of primary construction products to China, suppliers have increasingly become a liability.

Role of innovation:

Innovation has a crucial role in every sector, even more so during the pandemic. Tenda was quickly able to adapt to social distancing norms and even increase sales during the period. Innovation in construction methods is also crucial in allowing companies to have a competitive advantage over their peers. As new technologies develop, capital takes a higher percentage of investment in relation to labor. This also favors a more agile construction, which reduces the time needed to conclude projects. Tenda is exceptionally well-positioned in terms of innovation as it implemented a construction method with aluminum molds and concrete. This method enabled the Company to obtain the advantages of quicker and less labor-intensive construction in a country where labor liabilities play a significant role in the balance sheets.

Competitive positioning

Tenda's competitive positioning within the market will be evaluated through a SWOT analysis paired with Porter's five forces. This will be done using the former's division but going through all five aspects of Porter's forces (seen in Exhibit 11) inside the SWOT matrix.

Strengths:

When considering construction companies listed in the stock market, Tenda positions itself as the third-largest Company in apartments launched. Since it is the only company that works exclusively with the MCMV program, it has a competitive advantage in constant financing and great demand. For comparison, CYRE3 sales from January to June 2019 to MCMV bands 2 and 3 represented less than 30% of overall sales and MRVE3 around 80%. While focusing all its resources on various products directed to the same buyers may be a problem in some industries, it represents a significant competitive advantage when demand is not a problem. As long as there are no regulatory or significant political changes, the demand for affordable housing in Brazil should not suffer. This enables Tenda to focus on economies of scale through its standardization process and increasingly capital-intensive construction methods. Even though the Company already uses an innovative way of building homes by using aluminum molds and concrete walls, it is developing a new offsite construction method that will be implemented in the coming years. This will allow Tenda to see a substantial increase in revenue since its growth barrier is not currently based on demand but more so on the operational process of building. Offsite construction offers immense scalability for the Company. Price competition in the sector usually presents itself as a significant threat, but since TEND3 average sale price is already 20% cheaper than the average price for the same MCMV band, this is more of a strength for the Company.

Weaknesses:

One significant weakness of the Tenda model is its dependency on suppliers. Even though suppliers are well distributed and diluted because of the ease of substitution, any macro change in price and availability will severely affect the company. In times of normalcy, this is not a problem, but it has devastating potential given the pandemic. The increased demand for ore by China and increasing cases of COVID-19 in mining have both contributed to inflation and the unavailability of material in the sector. Concrete prices have also felt the impacts of the "new normal." Soaring prices and the absence of inputs should have an equal effect on Tenda and its competitors; however, due to the Tenda business model, which focuses on its speed of construction and asset turnover, this represents severe problems.

Opportunities:

The "new normal" presents itself as a substantial rupture with standard practices. From the increased need to work from home to selling houses despite social distancing, enterprises have taken various steps to adapt. Tenda has taken the rupture to accelerate its implementation of online sales. This allows the Company to improve marketing strategies and expenses management while maintaining the growth in sales. Costs associated with home-office performance for the administrative personnel are proving worthy as the Company saw a 4.84% increase in sales against MRV's 3.16% and Cyrela's decrease of 9.02% for the period of January to June 2020 (exhibit 13).

Threats:

In a market governed almost exclusively by the financing of a governmental program, the threat of new entrants is always significant. Even though the necessity of capital is somewhat large, any enterprise with some money can enter the construction business through the MCMV program. This threat is mitigated by the housing deficit but always present. What should be considered the most significant threat for all construction enterprises, and even more so for Tenda, because it works exclusively for the MCMV program, is regulation changes. If the government does decide to implement any changes to the program's rules or forms of financing, there would be a significant impact for all players involved. As for now, regulation changes should only favor the program in a bid to stimulate the national economy and attenuate the implications of the COVID-19 crisis.

There is also a significant threat posed by the rise in unemployment and a decrease in FGTS. Even though substantial, they should not mean much for the sector as the Brazilian economy's current structure is dependent on public financing and construction to generate jobs (seen in Exhibit 14).

Financial Analysis

Market share

Tenda's pronounced increase in sales, launches, and revenues in the last years has taken its market share in the MCMV launches from 0.8% in 2013 to 6.6% in 2019. The ~20% CAGR in the last five years was driven by operational excellence, and we believe Tenda is the best-in-class low-cost construction player in the MCMV 1.5 and 2 brackets since its competitors are mostly small countryside players focused on the old-fashioned masonry construction.

Aluminum molds - Up-sides and Down-sides:

One of Tenda's significant competitive advantages is the mix of a short construction period and a below-average selling price, which are both made possible by the Aluminum mold construction. However, the predictability of the construction costs using this method comes at a cost. During 2016-2019, Tenda's price per square meter was ~9% higher than the average BUC (Base Unity Cost) in the regions Tenda is present, but even using a more expensive construction method, Tenda managed to maintain its gross profit in line with its peers' average, mainly by reducing waste and labor expenses.

SG&A

Tenda's efforts to dilute its back-office expenses have paid off, and the SG&A expenses dropped from 2.6% from its revenues in 2015 to 17.4% in 2019. The optimization drove the keen reduction in the Marketing, payroll and related taxes, services provided, I.T., and payments of contingencies expenses. However, the new efforts regarding the offsite construction initiatives reverse the dilution trend in the G&A expenses since specialized labor is being brought to the team to lead the initiative.

Working Capital

Due to Tenda's fast construction rhythm and its exclusivity to the governmental program MCMV, Tenda's business model cash cycle is shorter than the market average, which requires less working capital and provides Tenda with the ability to have a higher asset turnover than its peers longer time-line while damaging the ability of most businesses to function correctly. The construction sector was not exempt from this impact as it faced the difficulty of selling houses without ever talking person to person with the client. Because of its early adherence to the digital revolution, Tenda had little problem ramping up the digital transformation and quickly adapted to online sales. In terms of gross sales, the Company sold R$ 941 million, its highest ever-recorded value for the January/June period. This reinforces the adaptive capabilities of the Company. MCMV and CVA financing programs follow the Percentage Of Completion (POC) system, and Tenda gets paid every month by (1/11) of the VGV of the apartments sold, which helps Tenda to reconcile its cash position and shorten its cash conversion cycle.

Capital Structure

By leveraging its balance sheet in the last 30 months (~R$ 2 billion contracted in loans), Tenda had a solid capital structure to get through the COVID-19 crisis while still maintaining its liquid cash position as one of the least leveraged players in the industry. The current capital structure (2S2020) is financed 49% by debt and 51% by Equity, preserving R$ 1.4 billion in debt and R$ 1.5 billion in cash, enough to liquidate all debt. The cost of debt is currently around ~5%, CDI+3%, but is expected to rise in the next years based on the worsening country risk and the ongoing fiscal crisis.

Profitability

In the last five years, Tenda has been increasing its operating margins and its mark-up, which made 2019 the best of the most recent years, reaching an EBITDA margin of 15.8% and a net margin of 13.6% and taking ROE and ROIC to 19.6% and 13.1%. However, we believe 2019 was an outlier and, since Tenda plans to increase its R&D and people expenses, we expect the EBITDA margin to be within the 10-13% range for the next years.

G&A expenses trend by increasing costs with specialized labor to lead the innovative initiative.

Valuation

As highlighted before, our model shows there is an upside of 22.3% for Tenda, enough for a buy recommendation. Its fair price of R$32.89 at the beginning of 2021 shows us the Company is undervalued, therefore, presents room for making money.

Percentage Of Completion Method (POC)

For our revenue & costs projections, we used the POC accounting method in which revenues and costs are recognized in accordance with the completion of the project and the sales of the real estate property.

Revenue Forecast:

Launches: According to Tenda's management expectations, the current business model has a limit of ~31 thousand launches, which is caused by a minimum requirement of 1,000 launches per city/region per year for Tenda to be profitable in a selected area. As Tenda operates with a great price point, we projected a market share gain driven by the increase of quarterly launches until 2024, when we believe they will reach full capacity with 31,297 launches.

Sales: For our sales assumptions, we divided sales into two major periods: in the project's launch (T0), when 60% of apartments are sold, and the next 16 months (5 months before the construction and 11 during the building), when 2.5% of units will be sold monthly.

For our average ticket projections, we assumed the percentage of apartments from brackets 1.5 and 2 sold would be constant, and 2019 prices would be corrected by the National Construction Cost Index (INCC) projection.

Cost & Gross Margin

Construction costs: Since Tenda's construction method is based on the Aluminum mold, the cost of construction in 2019 was 18% higher than the average price in the regions Tenda operates. From the price found in 2019, we projected the construction cost by correcting it by our INCC projections.

Land costs: Historically, the land cost has been a little volatile, around 10.7%-11.7% of VGV, so we projected the five-year average relation between land cost and revenues and projected it for the next five years.

Development cost: Tenda's development costs have been falling continuously in revenue percentage for the last five years, so we projected a soft reduction in the development costs for the next years, going from 4.5% in 2020 to 4.0% in 2025 and 2026.

Other costs: the remaining costs were projected constant in revenue percentage terms.

Gross Margin: Due to Covid impact and the rise of construction material, we projected a lower margin in 2020 of 29.7%, but raised the mark-up for the next years, going up to 33.3% in 2026.

SG&A & EBITDA Margin:

For the selling, general, and administrative expenses that were being reduced and diluted during the last years, we projected a trend reversal in which the offsite construction will lead to the increase in R&D and payroll expenses to develop a new business model. In our projections, our SG&A is going from 17.4% of revenues in 2019 to 20.4% in 2026.

EBITDA Margin:

Following the SG&A trend, the EBITDA margin from 2020 on will be slightly lower than the 2018/19 levels ranging from 9% in 2020 to ~12.0% in 2026.

CAPEX & Depreciation:

For PP&E, we assumed machinery & equipment, molds, and others would have to increase along with revenues and new launches, and for depreciation, we used the data given by the Company regarding the speed of depreciation for each line of the PP&E.

Working capital:

Tenda has a high necessity of working capital since it is necessary to buy land to increase launches and financing clients reach up to 20% of the VGV. Also, suppliers, payroll, related taxes, and profit-sharing are significant liabilities to the working capital construction. According to our assumptions on less inventory acquired, less financing for clients and less financing from suppliers, we expect Tenda's cash conversion cycle to get worse in 2020 and 2021 due to a high speed of growth and to increase gradually after 2021.

Cost of Capital:

Kd: Since Tenda has leveraged its balance sheet in the last 30 months, we have projected a gradual amortization of the gross debt. The cash generation will not be enough to face debt amortization, but Tenda has enough cash (and financial securities to liquidate) to amortize it. The percentage of debt will decrease gradually since we are not projecting the necessity of new debt issuances.

Ke: Tenda's operations are 100% in Brazil, so we decided to project the CAPM (Capital Asset Pricing Model) for the next seven years using Brazilian variables (except for the ERP) such as:

Rf**:** NTN-B Principal 10y proxy: Vertex 3673 from the CDI-IPCA SWAP (real interest rate for 10y) + long term IPCA projection liquid of capital taxes (15%):

Equity Risk Premium (ERP), Damodaran 07/2020: 5.23%

Unlevered β: 0.73 (5y beta = 1.09 deleveraged by the Hamada equation)

Average CAPM (2020-26): 9.6%

Disclosure: (1) NTN-B is a long-term inflation + yield bond, and to utilize it as a risk-free rate, we summed up our long-term inflation projections and subtracted 15% of capital earnings tax.

Discounted Cash Flow (DCF) & Free Cash Flow to the Firm (FCFF) methodologies:

The primary methodology used in our value analysis for Tenda was the DCF. In this methodology, we calculated the projected cash flows generated by Tenda's operation, not considering its financial/non-operational expenses. The average cost of capital for 2020-26 was 10.2% and the growth used in perpetuity was our INCC long-term projection of 3.4%.

Scenarios:

Due to Tenda's operational full capability being around 31,000 launches, we built three different growing scenarios in which Tenda gets to the 31,000 launches mark. For our bull scenario, we projected that Tenda would accomplish its full capability in 2023; for our base scenario, it would be in 2024, and in our bear case, Tenda would not surpass 31k launches until 2026. Since Tenda's business model does not support growing after its operational capability, even in our bull case, the valuation would be around ~R$33/R$34. Offsite construction could double Tenda's full capability and would have a significant impact on its business valuation, but as it is an early-stage project, we did not incorporate it in our projections.

FCFF and WACC

Risk

Business risks

Offsite: The offsite project can have a great return, but returns never come detached from risk. In its bid to implement the offsite project, Tenda has already been consuming a considerable amount of cash by hiring a team exclusively dedicated to the project while still generating no revenue. This means the project is consuming money in increasing amounts and, if the project fails, might turn into sunk costs. Being invested in the offsite project also suggests the Company would have a more challenging time changing its creative course if any other disruptive innovation overwhelms the sector.

Offsite logistics: Regarding the offsite bid in itself, even if the Company successfully constructs houses in a pre-specified location, taking homes to their destination is hugely problematic. Tenda will have to either spend tremendous amounts on transportation or develop new methods to do so efficiently. This will require a large part of capital and immense commitment from the Company, maybe even making the project infeasible.

Dependency on a single revenue source: Tenda is 100% dependent on sales of houses backed by the MCMV program. This presents itself as a significant risk to the Company because it is completely dependent on that source and, as the old saying goes, never put all your eggs in one basket.

Increased Administration expenses due to the more extensive operation: As Tenda grows, its administration becomes more costly and harder to manage. Swollen management means higher costs and lower margins in all operations. Tenda is expected to increase house sales from 19 thousand in 2020 to 31 thousand in 2024, and that will challenge the Company's operational capabilities.

Availability of inputs: With the increase of global demand and decreased production due to the pandemic, there is a great risk of unavailability of construction inputs. Tenda is especially vulnerable to this unavailability since it works with a quicker capital turnover and, therefore, any absence of inputs will significantly damage the Company.

Default rates: When families buy a Tenda property, they acquire financing from state-owned banks (Caixa Econômica Federal and Banco do Brasil) linked to the MCMV and CVA programs. Both programs finance up to 80% of the property, leaving the remaining 20% in charge of Tenda, through FGTS subsidies, financing, or a down payment. The Company is, therefore, exposed to default risk from its customers.

Currently, Tenda's net provision for doubtful debts (PDD) portfolio stands at 333.1 million, with 61 million pre-delivery (before delivery of the property), and 272.1 million post-delivery (after delivery of the property).

Tenda's post-delivery provision funds are divided into:

· Undelivered: 100.6 million

· Delivered, Defaulted: 130.2 million

· Delivered, Defaulted in less than 90 days: 29.1 million

· Delivered, Defaulted in more than 90 days: 12.1 million

The Company's provision coverage index is 28.7%:

· Undelivered: 16.9%

· Delivered, Defaulted: 1.8%

· Delivered, Defaulted in less than 90 days: 17.2%

· Delivered, Defaulted in more than 90 days: 86.9%

Macroeconomic risks

FGTS reduction: There is a high risk associated with the FGTS because of its relevance to the Company. The most recent climb in unemployment and informal employment mean there is less money going into the fund, and there may have to be a re-adequation of policies. Withdrawals because of the pandemic have also further debilitated the fund's capacity to finance operations, as seen in exhibits 25 and 26. Both facts pose a significant risk for all companies that depend on government financing and even more so for Tenda since the Company has all its sales from the program.

Increasing rates are problematic for long-duration projects (seen in Exhibit 24) - Government overspending in the pandemic makes expected interest rates go up in the future. Because of the long duration of housing finances, the sector is hugely dependent on interest rates.

Cyclical demand: The Construction sector has cyclical demand, which highly influences Tenda's ability to navigate the market.

Land prices: At a time of increased demand for land, due to the fall in interest rates and devalued real, land value tends to rise, squeezing Tenda's profit margin. This is due to the Company's inability to pass its cost increase to the final customer. Lower rates push investors towards other, more profitable investments and make taking loans cheaper. A more affordable Brazilian Real also enables bargains for land and other assets in Brazil for foreign investors.

Inflation: Since prices are given at an international level, and there was a rise in demand from China and a decrease in production, there is expected inflation for the sector, as seen in exhibit 27. With the same causes of availability of inputs, its consequences differ significantly by pressuring the Company's margins and placing the Company in a tight spot.

Changes to the MCMV program or credit restriction from lender banks: Any change to the MCMV program represents a massive risk to Tenda since the Company's sales depend solely on the program. The Company gets 80% financing of its constructions from the public program and has all its cash flow, working capital, and even margins built around its ability to swiftly and consistently work within the program. Lender banks also pose a significant threat since a reduction in credit would devastate the Company.

ESG (Environmental, Social and Governance)

Environmental

Primary products in the construction of Tenda:

Aluminum molds: The aluminum mold is the material responsible for optimizing the construction of Tenda units. It is, therefore, essential to understand the impacts this material has on the environment.

Aluminum is not a product extracted directly from nature, requiring industrial production to obtain it. The primary raw material used in this production is Alumina. The extraction process of Alumina is achieved through the utilization of the Bayer process in refining bauxite. After obtaining this Alumina, which is aluminum oxide (Al2O3), it is necessary to purify it into metallic aluminum. This can be done through a process called electrolysis, in which an electric current passes through Alumina, causing it to transform into metallic aluminum, the primary aluminum.

Positives about aluminum:

Aluminum has a recycling rate near 100% and high corrosion resistance, allowing several uses before its obsolescence. It is also an extremely light material, easy to be processed and molded, generating greater production efficiency.

Recycling:

Aluminum has a property that allows it to be recycled several times without losing its properties, making it extremely beneficial to the environment since recycling 1 kilogram of aluminum consumes only 5% of the amount of energy needed to produce the same amount of aluminum from scratch.

Recycling also contributes to the preservation of the ozone layer, reducing CO2 emission by 9 tons (each ton of CO2 is equivalent to driving about 4,800 km).

Negatives about aluminum:

Because aluminum is a stable metal, huge quantities of energy are necessary to create it. In the metal production, greenhouse gas emissions are considerably high since bauxite and Alumina's extraction emit significant amounts of carbon dioxide and perfluorocarbons (PFCs). Being major contributors to the greenhouse effect, PFCs are considered to be 6500 to 9200 times more potent than carbon dioxide in creating the greenhouse effect. Red mud is also generated in Alumina's production during the clarification stage of the Bayer process, which is an extremely toxic and hard-to-manage waste. The Environmental Protection Agency (EPA) and the U.S. Environmental Protection Agency, do not consider red mud as toxic waste. However, because it is extremely rich in metals and has a very high alkalinity residue, the mud can have a powerful influence on the environment, changing its properties and stability. A great example of accidents caused by red mud is the rupture of Vale's dam in Brumadinho.

Comparison of competitors' environmental projects:

Cyrela: Cyrela is part of recycling programs and a carbon-neutral program (CarbonoNeutro®). The Company is also a benchmark in waste management, with thorough sustainable planning and well-established sustainability criteria for all suppliers.

MRV: MRV is considered the most sustainable Company in the civil construction sector by the Exame Sustainability Guide.

The Company has been launching numerous projects aimed at sustainable development, namely: i) Planting over 1.2 million trees since 2010; ii) pioneering the implementation of photovoltaic panels in its constructions, making energy use sustainable. 70% of its projects launched since 2019 have this system; iii) Implemented a project that has removed 700 thousand tons of CO2 from the atmosphere; iv) Introduced systems that reduce water and energy consumption; v) Purchased carbon credits - 100% related to their emissions; vi) Connected with SDGs and the 10 principles of the U.N. Global Compact; vii) carries out a thorough assessment concerning the environmental impacts of its suppliers and others.

Tenda: None available / no disclosure of environmental projects

Social

Comparison of competitors' social programs:

Cyrela: One of Cyrela's main social focuses is to improve the living conditions of its employees' families. For this improvement to happen, the Company provides education to all workers to eliminate illiteracy. It also stimulates an increase in its employees' average family income by offering professional training courses to their wives and professional training to their kids.

The Company also created the Cyrela Institute, an institution dedicated to developing programs and NGOs. One of the institution's main programs is to offer professional initiation in needy communities.

MRV: it has some social measures: i) The MRV Institute, which invests in education. MRV invests annually 1% of its net profit in the Institute's projects, which corresponds to nearly 6.5 million per year; ii) Combat work in conditions analogous to slavery by using operational objectives to certify that its suppliers and outsourced employees comply with the established measures; iii) Project to diversify race and gender in their operations; iv) Carry out projects for the development of peripheral areas, among others.

Tenda: None available / no disclosure of social projects

Corporate Governance:

Tenda is listed on B3 in the Novo Mercado segment, which is responsible for leading companies to the best corporate governance practices. It is one of the few companies that meet 100% of the criteria required by the Novo Mercado (see graph X). Among them the executive committee and the remuneration.

Employees: Tenda has 5,453 employees (Q2 2020), of which 65% are staff employees who carry out activities in the buildings.

Administrative council: (seen in Exhibit 14)

The board of directors is composed of a minimum of 5 and a maximum of 10 members. All members are elected for a 2-year term in office and can be reelected or removed at any moment by council assembly. Tenda's board of directors is composed of 7 elected members with a 2-year term of office, being 100% independent, having no family ties and all being individually assessed for their performance. The board of directors is responsible for appointing and supervising the executive officers. Board decisions must be approved by a majority vote of the directors present.

Executive board:

The members of the Company's board of directors appoint the composition of the Executive Board. According to the Brazilian Corporate Law, these officers must be Brazilian residents, with a three-year term and may be reelected or removed by the board of directors at any time.

The members of the executive board are legal representatives of the Company, being responsible for carrying out the Company's operations, implementing the policies and guidelines as determined by the Board of Directors. Following the rules of the Novo Mercado, the board of directors of Tenda must have a minimum of two and a maximum of twelve members. Currently, Tenda's Executive Board is composed of 10 members. Of these members, two are fully focused on the development of the offsite system.

Compensation policies:

The compensation policies aim to determine the compensation criteria and models for the Board of Directors, Advisory Committees, Fiscal Council and Statutory Board of the Company, in line with the best compensation and corporate governance practices. Variable remuneration has a significant share in the total remuneration, allowing a greater alignment of interests between executives and shareholders. The Company adopts a compensation composition model that concentrates a significant portion of total compensation in the variable components, both short and long term, which is part of its policy of sharing risk and results with its managers. The targets are defined for the period in indicators such as ROE, cash generation, EBITDA, and volume of transfers.

Types of compensation:

Short-term compensation:

The objective of short-term variable remuneration is to reward the year's result, if the goals established for the period are attained in the Company's Scorecard, which is approved annually by the Administration council and contains the goals defined for the period.

Long-term compensation:

Likewise, long-term incentives, based on the option to purchase shares and restricted share programs, aim to reward the result of a longer period, usually from 3 years. The Stock Remuneration Plan only considers the valuation of the Company's shares (including dividend distribution and interest on own capital) within the periods predetermined by the program.

The participant (and no longer the Company) runs the risk of appreciation or devaluation of the share price during vesting periods and the program lock-up.

Professional positions:

Executive Board:

The members of the statutory Executive Board are compensated with fixed remuneration, short-term variable, and long-term share-based incentives. The amount paid as fixed compensation, short-term variable and long-term incentives, thus allowing an alignment of interests between the board and the Company's shareholders.

Administrative Council:

Approximately 50% of the total compensation of the members of the Board of Directors is defined, based on the format of restricted shares, considering the share price at the time of compensation. The shares granted will only be transferred to the beneficiaries after the vesting period (2 years) and may be traded on the stock exchange after 1 year of lock-up, that is, 3 years from the compensation. Thus, the remuneration of the Board of Directors is directly aligned with the Company's results during the period and the consequent appreciation/depreciation of shares.

Disclaimer:

All investments, even more so stocks, are speculative in nature and involve a substantial risk of loss. We encourage investors to invest carefully. We also encourage investors to get personal advice from your professional investment advisor and to make independent investigations before acting on information that we publish. All our information was derived directly from companies' information or submitted to governmental agencies, which we believe are reliable but are without our independent verification. Therefore, we cannot assure you that the information is accurate or complete. We do not in any way warrant or guarantee the success of any action you take in reliance on our statements or recommendations.

Past performance is not necessarily indicative of future results. All investments carry risk and all investment decisions of an individual remain the responsibility of that individual. There is no guarantee that systems, indicators, or signals will result in profits or that they will not result in losses. All investors are advised to fully understand all risks associated with any kind of investing they choose to do.

Don't enter any investment without fully understanding the worst-case scenarios of that investment.

Iran, the unforeseen opportunity

Jose Artur Fortunato — Tue, 21 Jan 2020 15:18:13 GMT

The Tehran Stock Exchange (TSE), Iran’s only stock market, was the best performing market in dollars in 2019, yielding capital gains over 100% on a year over year (YoY) basis. The TSE’s rally comes as an enormous surprise to most, given the turbulent year Iran experienced in 2019 due to increasing tensions with the United States, the disbandment of the nuclear deal, and sanctions imposed upon the country. Anyhow, its stock market seems to be flourishing and full of opportunities for incredibly risk-tolerant investors. The flourishing of the Iranian stock exchange does not mean the TSE is a safe bet considering its immense geopolitical, currency, and fiscal risks.

Geopolitical risk

One significant source of geopolitical risk for Iran is its conflict with the United States. Even though the recent crisis that led to the killing of General Qassem Soleimani seems to have de-escalated, Iran’s foreign affairs do not look bright. In 2018, the country suffered severe sanctions from President Donald Trump, which made the country’s economy stagger. The American president restricted all foreign firms from dealing with Iran in an attempt to hinder the Iranian economy. Both the United States and European Union have also restricted almost all other sectors of the Iranian economy.

The present restrictions on the Iranian economy forbid citizens of the United States to operate in the TSE. Europeans who decide to invest in the TSE incur plenty of legal expenses. The burden of working on the TSE can be understood by the fact that the Bloomberg terminal, the world’s largest financial terminal, does not give access to the TSE’s index.

Currency risk

Iran has a high currency risk because of the many sanctions it is facing. Sanctions hinder the country’s access to international currency not only due to trade but also by rendering its monetary policy ineffective. The country has to ensure its ability to pay by trading directly with other countries and not by using the international currency.

Its incapacity to use foreign currency would constitute a colossal burden if it were not for its large share of essential commodities like petroleum. Holding the world's 4th largest reserves of oil enables Iran to trade with relative ease and lightens the onus of foreign sanctions regarding currency risk.

Fiscal risk

The ample fiscal risk associated with the Iranian economy arises from its recent decrease in GDP and a significant part of the economy revolving around petroleum. The country saw its GDP rise to nearly US$ 600 billion in 2012 and then descend back to US$ 385 billion only three years later. Such a collapse in GDP alone is enough to provoke a fiscal calamity since government revenue is directly proportional to GDP. However, ever since its lowest point in 2015, Iran's GDP was able to resume its growth for the following two years, followed by a slight decrease of 1.5% in 2018 after new foreign sanctions were imposed by the United States. Forecasts expect the slump to increase in the following years.

Iran’s services sector represents nearly 51% of GDP, while petroleum still constitutes almost 20% of the country’s wealth. Having such a large portion of cash associated with oil leaves the country extremely susceptible to changes in the commodity’s price and other factors beyond Iran’s control.

Yet, a sea of opportunities

Despite all the risks associated with the Iranian market, its recent performance has been astonishing. In 2019 the TSE rallied from 161,000 to 375,000 index points representing a nominal increase of 132%. Even in 2020, after the killing of Soleimani and the various other geopolitical instabilities that plagued the country, the TSE has seen a near 10% increase.

Tehran’s stock exchange rally can be attributed to the sanctions imposed upon the country by foreign nations. Sanctions imposed on a country act as an unintended protectionist policy, which expels existing import firms and generates a barrier to entry for new international competitors. With the expulsion of import firms and the incapacity of foreign competitors in assuming the gap, national producers gain market share. Domestic producers' increased market share enables them to access monopoly gains evidenced in the Iranian market through its heightened dividend payouts. Like economic profit, monopoly gains are a phenomenon prevalent in uncompetitive markets, which allow firms to have above-normal profits in a suboptimal equilibrium.

The ability to set higher prices established by colluding enterprises leads to an inefficient allocation of assets and inflation. In this specific scenario, there is a close relationship between inflation and an inefficient allocation of assets because the rise in prices that will lead to inflation is due to the firms’ capacity to set prices and incurrence on monopoly gains.

In the Iranian case, where they have little control over its protectionist policy (sanctions), society will continue suffering from rising inflation. Nevertheless, private enterprises accessing monopoly gains are having an atrocious increase in profit because production costs are relatively unchanged while prices increase. In the end, Iranian society is bearing the burden of the increased prices while the stock exchange rallies. It must be noted here that there is inflation all around the Iranian economy. Still, because of the oligopolistic firms’ capacity to set prices, they can increase prices at higher-than-inflation rates, snowballing their profits.

Even with all its problems, Iran’s stock exchange looks like a great opportunity for massive returns if you have the means of accessing it. Anyhow, investors willing to take on its risks should be cautious and wary of the disruptive fashions of the market failures enabling TSE’s unforeseen rally.

Opinion: Outcomes of the US - Iran conflict

Jose Artur Fortunato — Wed, 15 Jan 2020 15:23:39 GMT

After almost 20 days of conflict, Donald Trump comes out as the clear winner from the killing of Soleimani, while Iran's own mistakes dissolve any international support the country might have gathered.

The American drone attack ordered by President Trump articulated to kill Iranian general Qassem Soleimani reinforces U.S. military superiority and Trump's devious geopolitical ways. The attack came as a response to the killing of a U.S. military contractor and protests around the U.S. embassy in Baghdad. Even though all human life is equally invaluable, a general like Soleimani embedded the fate of hundreds of thousands and was capable of shaping their worldviews classifying his killing as an absolutely disproportionate response to the previous events. Anyhow, Iran still managed to damage its reputation with hideous mistakes that should have never happened. Let us dive into why those are the outcomes of this episode, but first, a quick review of the events.

Protestors near the American embassy in Baghdad on December 31.

December 27

American defense contractor killed in an Iraqi military base by a rocket attack from Kataib Hezbollah, an Iranian-backed Shia militia group.

December 29

The United States executed two airstrikes in Syria and one in Iraq as a response to the previous attack, killing 25 people.

December 31

Violent protestors gathered around the U.S. embassy in Baghdad.

January 3

President Donald Trump ordered an airstrike killing ten people, including one of Iran's most adored revolutionary figures, Qassem Soleimani.

January 7

Iran retaliates for Soleimani's killing by attacking two U.S. military bases in Iraq without casualties. Later on, the same night, Iran uses a surface-to-air missile to shoot down a Ukrainian airplane leaving 176 dead. In an official statement, they denied their involvement in the event.

January 11

After the surfacing of various videos and allegations that Iran had shot down the Ukrainian plane, they finally admit having mistakenly targeted the plane believing it was a U.S. missile.

President Trump before addressing the nation on January 8th, after Iran's retaliation.

Trump and the U.S.

Since his election, Trump has been taking various measures against peaceful intergovernmental organizations like the United Nations by disregarding its treaties, among other contestable actions. Regarding the U.N. itself, Trump slashed its 2018-19 budget by around US$ 285 million. The cutbacks arrive as a contest to the U.N.'s diplomatic capacities, especially considering the U.S. is responsible for more than 20% of the organization's budget and even before the cut already had one of the smallest contributions of any developed country in proportion to gross national income (GNI).

With that in mind, the American President has been conducting his foreign policies through the sheer display of military power as a means of bargaining with other countries from higher ground. This method of dealing with international conflicts is extraordinarily questionable and dangerous, cutting back on almost two decades of ease on military tensions since the end of the Cold War and the dissolution of the USSR.

The doomsday clock, which considers the end of the world will occur when the timer hits midnight, is at 2 minutes to midnight, as close to midnight as in 1953. In 1953 the world saw various armed conflicts and the development of thermonuclear weapons by the USSR. The Bulletin of the Atomic Scientists, the organization responsible for the doomsday clock, titles the current world's state of international affairs "The new abnormal."

Trump personally came out of the current episode with Iran as the incontestable winner. He was able to reinforce American military superiority through his command, generate some certainty about his ludicrous ways to deal with conflicts, and probably gained more momentum for his 2020 campaign. That is not without damaging the U.S. image as a trustworthy (and sane) international police as had been the case since the end of World War II.

The crucial role played by other governments in the de-escalation of tensions between both countries is also worth noting. Markus Leitner, the Swiss ambassador in Tehran, passed on the message that Iran's counterattack had ended so the U.S. would refrain from taking unnecessary counter-measures, among other, not less critical, reports.

Iranians paying tribute to General Qassem Soleimani.

Iran

The tensions between Iran and the U.S. have been rising since Trump's election. The American President enraged the Islamic Republic with his discriminatory rhetoric during his campaign and subsequent travel ban. As a fulfillment of one of his campaign promises, the American President withdrew from the Iran nuclear deal setting the stage for indirect attacks between both countries until the present conflict erupted.

After the killing of General Soleimani, Iran vowed revenge and finally settled the dispute on January 7 by attacking two American military bases in Iraq. Iran might have attacked an evacuated American military base yielding no casualties on purpose, aiming not to provoke more retaliation from the U.S., though that will never be certain. From the looks of it, the narrative of a military fiasco in which they were out-maneuvered would clamp stronger.

Let us not forget Iran also shot down a civilian plane by mistake while thinking they were intercepting an American missile. The error represents the tipping point for all international support the country might have fostered. The killing of 176 people in such a gruesome form represents Iran's absolute lack of respect for human life and the government's lack of unity and sync.

After the airplane crash, the Iranian government first tried to conceal from public knowledge their mistake alleging mechanical failure and denied foreign authorities to aid in the investigation. Within the next few days, a horror show regarding foreign policy ensued. As new evidence surfaced, which revoked their claim of mechanical failure, Iran accepted external help for the "investigation" while still denying what had happened. The country also decided it would be a great plan to recover all the debris before any help arrived, so a proper investigation could not be conducted properly. Four days after the crash, incontestable evidence that the plane was shot down had emerged, and Iran finally conceded their mistake. They have promised a thorough investigation, which is already shaping their scapegoat.

The Trump administration has also already enacted more economic sanctions against Iran due to their retaliation. The sanctions imposed upon the country come as an enormous burden to the already struggling Iranian economy, which sees its yearly inflation soar over 40%. International sanctions might also be approaching, aggravating the problem.

Aftermath

At the end of this episode, while the U.S. seems to have emerged as the winner, the whole world is left perplexed and fearful of Trump's ways. After Soleimani's killing, Iran would have come out with international support if it was not for their mistake regarding the Ukrainian airplane. Now Iran is left without backing and awaiting more economic sanctions that will further harm its problematic economy.