Booming Brazil: The new China

By Jon Markman

If there is a single word to sum up the global rallies in steel, iron ore, gold, grains and energy over the past three years, it is Brazil.

The biggest country in South America has become the world's biggest exporter of raw materials and is prospering like none other on the planet. Its stock market hit an all-time high last week as all others faltered.

While most Americans have been too depressed over home and banking woes to notice, and as even China and India have sputtered, Brazil has boomed. It's not an exaggeration to suggest investors should now look upon the former Portuguese colony as the new China -- a top dog among global economic powerhouses that smart investors ignore at their peril.

In late April, bond rating agencies took notice, upgrading Brazilian sovereign debt to investment grade for the first time. Domestic investors celebrated, pushing up key stocks as much as 5% in a single day until the euphoria subsided a touch.

But make no mistake: The enthusiasm for Brazilian stocks is far from complete, for as long as the world remains in need of ore, energy and food, companies from São Paulo in the south to the Amazon basin in the north are going to keep up their blistering pace. A global economic slowdown would temper but not halt Brazil's growth.

Brazil's future has arrived

Although the nation's key Bovespa Index is up 535% since 2003 -- almost nine times the return of our Standard & Poor's 500 Index ($INX) -- it does not appear to be overvalued.

Brazil's big industrial companies are still cheap, mostly because their story is not yet fully believed. They are not getting the credit they deserve as fiscally clean giants in a country largely free of the extreme corruption, political disharmony and waste that has hampered peers in emerging markets.

It's kind of crazy for old-timers to imagine that Brazil, which needed a $40 billion rescue from the International Monetary Fund in mid-2002 to escape a nearly fatal crash of its currency, could have emerged as a sober and responsible member of the world economy, largely free of the over-borrowing that has killed Western banks and brokers. Charles de Gaulle, after all, is credited with quipping disdainfully that Brazil was the country of the future -- "and always will be."

That very skepticism is what will allow you to take advantage of this unfolding epic. In a moment, I want to share some of my top Brazilian stocks -- companies that should be added on dips to every investor's portfolio now that the stigma of junk sovereign credit is off the books. But first let me give you some background and set the scene.

Most analysts date Brazil's turnaround to the presidential election of Luiz Inácio Lula da Silva. Virtually from the moment he took office in 2003, Brazilian stocks threw off a long-term bear market and got their bull on. You might imagine this was because a capitalist had taken over from socialists or the military, but that's way off the mark.

Silva grew up poor in São Paulo, had little formal education, worked his way up through the steelworkers union and at first was compared unfavorably by fretful currency and bond traders to radical left-wingers Daniel Ortega in Nicaragua and Hugo Chávez in Venezuela.

• Video: Bullish on Brazil

Yet Silva stunned the world by putting competent pragmatists in key positions as central bank chief and finance minister, says Steve Murphy, a venture capitalist who has divided his time between Brazil and Seattle for four decades. In an interview this week, Murphy told me that Silva and his partners had leveraged a free-market ethos to improve the tax code, the legal system, agricultural production and industrial output, all while somehow maintaining a great relationship with the poor and middle class.

"They have not killed the goose that lays the golden egg," says Murphy, observing that's been a rarity in a region where governments have repeatedly overtaxed companies to pander to voters, undercutting their profit motives.

Rich in resources

Silva was aided in his quest to grow Brazil into an export powerhouse by a decision by military dictators in the 1970s to commit the country to self-sufficiency in energy. At the time, it meant the widespread development of the nation's vast sugar cane crop as an efficient feedstock for ethanol. Most Brazilian cars and trucks now run on pure ethanol, a mix of ethanol and gasoline, or natural gas cheaply procured from neighboring Bolivia.

In the past couple of years, large oil and gas fields have been discovered offshore in the south by national energy titan Petroleo Brasileiro (PBR, news, msgs), so the country is expected to be independent of foreign sources of fossil fuels by 2015.

Continued: An agricultural powerhouse

READ MORE: CHINA - BRAZIL - STOCK PICKS - ENERGY - EMERGING MARKETS

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