Brazil Finally Makes the Grade

Last week Brazilian financial markets got a good reason to celebrate as credit rating agency Standard & Poor’s finally elevated the country to “investment grade” status.

This comes as no surprise to me. In fact it serves as an epilogue to Brazil’s long story of economic success over the past decade. Since the end of 2000 Brazil’s Bovespa Index has been one of the world’s best performers gaining about 500%! So what will Brazil do for an encore?

I’ve been bullish on Brazil for a very long time. Last year I recommended the iShares Latin America Index ETF to Sovereign Society readers, which has a heavy allocation in this dynamic economy. The last time I wrote about Brazil in these pages (Amid Global Credit Crunch, It’s “Business as Usual” in Brazil) I described how the country has largely side-stepped the credit crunch turmoil that has impacted stock markets around the world.

Brazil’s Future is Now

In fact, Brazil’s Bovespa is one of just a handful of global indexes that’s actually posting year to date gains – up about 10% so far in 2008. For years investors derisively said that, Brazil is the country of the future… and it always will be!

The implication being that this vast resource rich nation has lots of potential… if it could only harness it and get its act together.

In recent years, Brazil finally got its fiscal house in order, paying off most of its foreign debts. Inflation, which ran over 1,000% in Brazil just ten years ago, has now been wrung out of the economy allowing interest rates to come down.

Today, Brazil is a creditor nation. It’s once shaky currency appreciated 22% against the U.S. dollar over the past 12 months! Brazil’s stock market is soared as its economy is humming along with robust growth of 6.6% in last year’s final quarter, compared to just 0.6% growth for the U.S. economy.

What a Difference an Extra “B” Makes

Given Brazil’s economic successes, it’s really no surprise that S&P elevated the nation’s credit rating from BB+ (junk bond status) to BBB- (investment grade) last week… what a difference an extra B makes.

The financial press was full of stories about how this ratings upgrade should lower Brazil’s cost of capital (true) and help deepen its financial markets by attracting more global capital flows (also true).

These are all very bullish arguments in favor of Brazil’s long-run growth potential. But 500% later, Brazil is really no secret to global investors anymore. Brazil’s booming economy is of course rich in natural resources. Leading companies such as CVRD and Petrobras come to mind.

The Next Great Buying Opportunity in Brazil

This dependence on resources has been one of Brazil’s greatest strengths in recent years, as commodity prices have soared.

However, it could also prove to be a weakness should commodities correct sharply.

The challenge for Brazil now is to diversify its economy away from such a heavy reliance on resource exports – and more toward internal consumption.

The country’s new investment-grade credit rating will help attract the capital needed to make this transition a reality.

In the meantime, if commodity markets correct more sharply in the months ahead – as I expect – it should provide another excellent long-term buying opportunity in Brazil.