Looking Toward the Brazilian Real as Country Records Trade Surplus

In setting up a portfolio, geographical diversification can help add and diversify portfolio returns. Investing in foreign stocks also helps minimize the currency risk of holding only U.S.- denominated assets. The U.S. dollar’s current slide demonstrated the importance of this strategy well.

In past commentaries, you’ve read my positive bias about looking at hot stock markets in Asia, such as India, China, Jakarta, and Korea, along with considering opportunities in Mexico and the renewed strength in Japan stocks.

But due to its close proximity to the United States, Latin America also presents good potential for the risk-savvy investor. Mexico aside, we have seen some superlative gains in Brazil. On Monday, the São Paulo Stock Exchange’s Bovespa index traded at an all- time high of 55,386, up over 62% from its 52-week low. Compare this to the current returns you’re getting in U.S. markets, and you can clearly understand why diversifying your assets would be a good idea.

Brazil is experiencing improving economic fundamentals. Its high benchmark interest rate, which is presently over 15%, creates a high interest rate differential between Brazilian assets and what you can earn elsewhere, so it attracts foreign capital. This foreign investment has helped prop up Brazil.

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While the rate is high, there is a reason behind it. Brazilian investments represent a much higher risk than U.S. or Canadian securities.

The country, which was under Portuguese rule for three centuries, became independent in 1882 and a republic in 1889. It has since developed into the dominant economic power in South America. Solid agricultural, mining, manufacturing, and service sectors drive the Brazilian economy.

The country is, however, vulnerable. In 2001 and 2002, the Brazilian Real collapsed. In the years since, the country has restructured its financial system, and it recorded trade surpluses in the period from 2003 to 2006.

While the situation has improved, there is still a risk in investing in Brazil. The government’s domestic and foreign debt is large, posing a threat to the financial structure. Income inequality is also a problem. If you want to invest in Brazil or any other Latin American country, you may want to do so via mutual funds or ETFs to help minimize the risk.