Safely Invest in Brazil via Mutual Funds or ETFs

In past commentaries, I’ve discussed the need for geographical diversification to both help aid and mix up your portfolio returns. Investing in foreign stocks can also help to minimize currency risk. I’ve also talked about looking at hot stock markets in Asia such as India, Jakarta, and Korea, along with Mexico, as well as the renewed strength in Japan stocks

In Latin America, risk investors will discover that there’s good potential there when it comes to investing, thanks to its close proximity and trading relations with the United States. Besides Mexico, we have seen some superlative gains in Brazil, as Sao Paulo Stock Exchange’s Bovespa index recently traded at an all- time high of 46,752 on February 22, 2007, which is up over 52% from its 52-week low. Compare this to the returns you are currently getting in the U.S. markets and you should clearly understand the need to geographically diversify your assets.

Brazil has been experiencing improving economic fundamentals — but also an extremely high benchmark interest rate that is presently at 13.25%, which was cut 12 straight times from 19.75% in September 2005. This high rate creates a differential between Brazilian assets and what you can earn elsewhere. Thus it attracts foreign capital, which has helped prop up Brazil. So, while the rate is high, there is a reason for it. Investing in Brazil involves higher risk than does investing in U.S. or Canadian securities.

The country, formerly under Portuguese rule for three centuries, became independent in 1882 and gained status as a republic in 1889. Brazil has developed into the dominant economic power in South America. The country’s economy is driven by solid agricultural, mining, manufacturing, and service sectors. However, Brazil is vulnerable. In 2001 and 2002, the Brazilian Real collapsed; since then, the country has restructured its financial system and has noted record trade surpluses in the period from 2003 to 2005.

While the situation has improved, some risks still remain when it comes to investing in Brazil. The government’s domestic and foreign debt is large, and it poses a threat to the financial structure of the country. Income inequality is also a problem that’s hindering Brazil. If you want to invest in Brazil, or any other Latin American country, you may want to do so via mutual funds or ETFs in order to help minimize the risk.