Corruption and deceit are hardly what an investor looks for in an international market for investment, but Brazil's financial markets have prospered despite accusations of corruption against many prominent members of government.
Brazil's Gross Domestic Product (GDP) grew nearly five percent last year, giving its financial growth a much greater potential than most well-established economies. That potential is being met as the nation's stock markets have risen 11 percent since the beginning of the year.
Though this number may not seem extraordinary when compared to other emerging markets, it does not take into account the spectacular rise in value of the real, Brazil's currency. In terms of the U.S. dollars, the market has risen over 30 percent since the beginning of the year.
In the last two years the Bovespa Index - composed of the 57 most liquid stocks on the Sao Paulo Stock Exchange - has risen approximately 70 percent in value. During the same period the Dow Jones had a return of less than ten percent. The appreciation of the real makes return even greater from the perspective of an international investor.
The country's strong currency has been a strong factor in encouraging investment from abroad, driving up the value of the country's financial markets. Brazil is among word leaders in real interest rates, leading foreigners to invest their money with a country that will provide much higher yields.
Brazil's economy is centered on exports. With a $40 billion trade surplus forecast this year, there is a strong demand for Brazilian currency.
These issues, unfortunately, can be problematic for people actually living in Brazil. High interest rates make it difficult for individuals and businesses to secure loans, making them over reliant on foreign investment. The enormous trade surplus further demonstrates Brazil's reliance on the global economy. Their corporations will only prosper as long as they have foreign countries purchasing their goods.
On Sept. 19, Brazil opened a new avenue for foreign investment, selling its first international bonds in its own currency. The bonds raised the equivalent of $1.5 billion for the Brazilian government. The ten-year bonds are very attractive to investors as they pay a yield of 12.75 percent, whereas the United States' Ten-Year Note currently pays a yield of less than 4.5 percent. If the real continues to appreciate significantly, the actual gains to investors will be even greater.
The yields would not be so high if it was not for the inherent risk with such a bond. Though Brazil has been able to keep inflation in check as of recent, it could return. A repeat of last decade's hyperinflation inflation would render these recently issued bonds virtually worthless.
There are several ways for an American to invest in Brazil quite easily. One is through the aforementioned government bonds. For someone looking for something more risky with has produced greater returns recently, there are promising mutual funds and an exchange traded fund.
The biggest fund is Fidelity Latin America (FLATX) with over $1.3 billion in assets. In the past year it has had over a 65 percent return. There are a few other large Latin American funds, but they all have had similar returns (65 to 70 percent) over the past 12 months.
There is an exchange traded fund that has a specific focus on Brazil: the iShares MSCI Brazil Index (EWZ), which has had a nearly 60 percent return in the previous 12 months.
As long as Brazil continues to provide these extraordinary returns, domestic as well as foreign investors will continue to speculate on the nation's markets. Though the potential may be great, this haven for investment will only continue to flourish for as long as investors feel they can trust the stability of a country whose government has been mired in controversy.
Michael Trachtenberg is a sophomore who has not yet declared a major.
