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A stumble soon for Brazil’s stock bulls? That might be a gift

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The old joke about Brazil was, ‘It’s the country of the future, and always will be’ -- a reference to the economy’s struggles of the 1980s and ‘90s that stemmed from gross government mismanagement and a heavy national debt load.

But in this decade the joke has been on investors who figured Brazil’s past was prologue. The country’s stock market has been red hot for five years, the happy side effect of an economic turnaround fueled by surging exports (particularly commodities) and booming domestic consumption.

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Last week Brazil’s recovery passed another milestone: Credit-rating firm Fitch Ratings raised the nation’s sovereign debt to investment-grade status. That followed a similar move by Standard & Poor’s on April 30.

With two of the big three rating firms agreeing that Brazilian debt no longer is speculative in nature, the bonds now can be bought by institutional investors that had to steer clear without that endorsement. Brazil’s currency, the real, on Friday hit a nine-year high against the U.S. dollar after Fitch’s move, another sign of global investors’ faith in the future of the world’s fifth-most-populous country.

But all of the good news begs the question: Is it too late to play Brazil as an investment? The main stock index, the Bovespa, is up 13.6% this year. It’s one of the few markets in the black. The iShares MSCI Brazil Index fund traded on the New York Stock Exchange is up 23% for the year, reflecting the rise in share prices and the currency benefit.

The iShares Brazil fund’s annual gains since 2002: 113% in ’03, 31% in ’04, 50% in ’05, 40% in ’06 and 72% in ’07. Quite the mercado em alta (bull market in Portuguese).

Predictably, some analysts are turning gun-shy about Brazil, as this Bloomberg story details. A sharp drop in commodity prices could trigger heavy profit-taking in the country’s stocks, including oil giant Petrobras. What’s more, rising inflation is becoming worrisome in Brazil (as in much of the world), and may spur the nation’s central bank to raise interest rates this week.

But long-term investors may well want to treat any pullback in Brazilian stocks as a gift. It’s the trend that’s important, and I think Brazil is a great example of the ongoing transfer of wealth and power from the developed world to the developing world. Roger Cohen has an excellent take on this subject in the International Herald Tribune. Read it here.

Image above: The flag of Brazil. The inscription reads ‘Order and progress.’


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