Last Thursday, S&P raised Brazilian debt to BBB-, one notch above junk bond status and its first investment grade rating in history. Incredibly, credit spreads for Brazilian sovereign debt are just 132 basis points above Treasury bonds on seven-year debt, or yielding just 5.07%. In the 1980s, Brazil couldn’t give its bonds away with inflation in the double-digits.
Brazil joins Mexico and Chile as Latin America’s third investment grade sovereign nation.
Here’s another mind-blowing number: since 2000, the BOVESPA stock index has skyrocketed over 1,600% in dollar terms and is actually up 15.7% this year, even as the majority of emerging and major markets remain in the red.
Brazil’s economic and fiscal achievements in the post-2000 period have been most impressive. The country now has a bulging trade surplus, budget surplus and the strongest currency in the Americas. In fact, it’s been one of the world’s best performing currencies since 2002, not far behind the euro.
Brazil has also dodged the subprime bullet. As subprime has gripped U.S. financial institutions since last July, Brazil’s banks have largely escaped the credit crisis. Securitization, a dirty word among global investors since the advent of the mortgage-backed securities blowup, is barely a fixture on Brazilian bank balance sheets.
Since April, when the U.S. dollar began to muster a bear market rally against most foreign currencies, the Brazilian real has actually gained 1%.
Is this a good time to buy Brazilian? Are Brazilian assets now in “bubble” territory?
I think the ship has long left the harbor. Credit spreads on Brazilian debt are too narrow, the currency is heavily overbought and the country is still mired by high public debt. Also, a surging currency over the last six years might start diluting some of the country’s export competitiveness.
As long as commodities remain in a secular bull market, however, Brazil’s economy will charge ahead. It’s an enormously rich nation. Brazil will be a great short sale candidate once raw materials hit a peak. Until then, it’s a freight train.
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