Imagine a vast nation of 196 million people, self-sufficient in oil, with a ready market in China for its iron ore and a middle class that has swelled by 20 million in less than a decade.
Twenty million people lifted from poverty since outgoing President Luiz Inacio Lula da Silva and the Workers' Party came to power. Twenty million new consumers yearning for houses, clothing, financial services. No wonder global investors are rushing, cash in hand, to Brazil.
Brazil's strong growth, relatively high interest rates and a flood of "hot money" - short term, speculative capital - have made the Brazilian real one of the strongest currencies in the world since late 2008. And the yields: Where else can you get an 11-per-cent yield on a bond denominated in a rising currency?
To stem the tide, the government raised its tax on foreign investments in fixed income securities to 4 per cent from 2 per cent last month and extended it to include equity funds. The tax does not apply to investments in individual stocks.
Yet as recently as the 1990s, Brazil was racked by inflation raging at 1,000 per cent a year and more, fuelled by runaway government spending. When Fernando Henrique Cardoso, an economist, became president, he raised taxes, cut services, let unemployment rise, upped interest rates and eventually brought inflation under control. It stood at an annual rate of 4.7 per cent in September, slightly above government's target of 4.5 per cent.
A decade or so ago, emerging market investors eyed Brazil for its oil company, its telephone company, iron ore giant Vale and perhaps a brewery, steel company or cement company. Today, its allure is its growing domestic market, global money managers say.
"It's a widening of investment opportunities," says Robert von Rekowsky, vice-president and portfolio manager of the Fidelity Emerging Markets Fund.
"We went from Petrobras and Vale to domestic companies such as banks, financial services, credit card companies, education companies, home builders, retailers and other consumer-oriented companies," Mr. Von Rekowsky says. "It's a more balanced market with more companies to look at."
Add to that the country's vast offshore oil fields and the opportunities that arise from its continued infrastructure investments.
"Port operators, logistics companies, rail lines and such are certainly going to offer attractive opportunities," says Tim Morris, client portfolio manager of the Mackenzie Universal Emerging Markets Class fund.
Thomas Pinto Basto, associate portfolio manager of the AGF Emerging Markets fund, agrees. Transportation bottlenecks have to be resolved, which is why AGF likes America Latina Logistica, a railway company. "It's the Brazilian Canadian Pacific or CN," he says.
Brazil's oil wealth will continue to fuel growth in the domestic economy, money managers note, which is good for consumer staples and consumer discretionary companies.
On this front, AGF favours retailer Lojas Renner, a department store that used to be owned by JC Penney. "Management has a great execution plan, a great brand, and they're good at creating demand."
Mr. Von Rekowsky also likes Lojas Renner. "The stock has been in our portfolio for a while and it has worked out very well."
On the political front, the country appears to be making the transition to a new president without market turbulence, portfolio managers note. The second round of elections takes place at the end of the month.
Still, too much success can lead to runaway prices in time. Inflation "has been a definite monster in the closet for Brazil historically," Mr. Pinto Basto notes.
The giant Chinese economy also looms large in Brazil's future. "You can't talk about Brazil without talking about its link to China," Mr. Von Rekowsky says. Brazil benefited from Chinese demand twofold in that commodity prices rose in line with exports to China.
"That's a very good backdrop. High commodity prices bolstered Russia and Brazil and allowed interest rates to come down and domestic drivers to kick in," he says.
Given all the attention Brazil has been getting, it's no surprise that money managers such as Mr. Von Rekowsky are finding it a tad expensive. The price earnings ratio on the Bovespa index is about 15.5 times next year's earnings, he says. "That's pretty expensive for an emerging market."
One misconception about emerging markets such as Brazil is that their companies have "emerging management teams," Mr. Pinto Basto says. "Far from it."
Successful managers of Brazil's big companies are among the most experienced and sophisticated in the world because they have lived through the hyperinflation of the 1980s and 1990s, he says.
"They understand the cost of capital, they're innovative, flexible, they take challenges and turn them into opportunities," he says - opportunities in which investors worldwide are increasingly keen on participating.