Brazil Points to a New Sovereign Debt Story (EWZ, BRAZ, BRF, BRAF, EWZS)

Will there be some slowdown in the BRICs and emerging markets for 2012? Yes… But let’s remember: It’s all relative – relative to the fact that those returns will probably be better than those of developed countries. Plus, who can say what dictates an emerging market anymore? Some have already emerged and can be considered growing markets – a term Jim O’Neill now uses for those countries he once coined BRICS.

Over the last three months we’ve seen a clear flip-flopping in a new world order. It sounds a little dramatic – because it really is. One of the best examples is Brazil. I know they’re a sexy country in the investment world at the moment, but there’s substance behind the flash.

And when you compare them to other supposed developed countries, they began to look a lot better.

Brazil Debt Upgraded in November

Standard & Poor’s upgraded Brazil’s sovereign dollar-denominated foreign debts to BBB from BBB- and upgraded the government’s local currency debt to A- from BBB+. It’s the first time since the nation’s inception that the government has an A rating on its debt. The S&P said the outlook for Brazil’s credit profile was stable with over $350 billion in foreign currency reserves, a stable economy and strong leadership on both the monetary and fiscal fronts.

Now if you take this information and compare it with Italy’s current bio – which somehow still has an A credit rating – there’s not much of comparison.

The Sixth-Largest Economy

According to the Centre for Economics and Business Research (CEBR), Brazil has already overtaken the U.K. as the world’s sixth-largest economy. As the banking crash of 2007 to 2008 and its subsequent recession are still being felt by developed countries, Brazil has been propelled by its exports to China and the rest of Asia.

The English newspaper The Guardian reported – while covering the CBRE’s announcement – that Europe is expected to suffer a “lost decade” of low growth following a credit binge over the past 20 years. Paying back debts over a short timescale will restrict growth and prevent many countries, including the U.K., from clawing back output lost in the banking crash for many years.

A Record Low Yield on Foreign Bonds

The Brazilian government sold $825 million in long-dated bonds on Wednesday and demand for the debt was so great that yield came in at a record low 3.449 percent. The bond’s coupon yield at par was 4.875 percent, but buyers pushed the value of the bond higher, meaning interest payments, or current yield on the bond, was sold at historic lows for Brazilian foreign debt.

Demand for Brazilian government’s dollar denominated bonds was seven times the anticipated volume, with an order book of more than $3.5 billion, according to Itau, one of the underwriters.

“Sovereign U.S. dollar paper of high quality issuers like Brazil still are favored by the marketplace in these turbulent times,” said Sara Zervos, an international bond fund manager at Oppenheimer Funds. “It’s analogous to the amount of money invested in money markets and U.S. Treasuries, low yield, but ‘safe.’”

CEBR World Economic League Table

Above is a table of the CEBR’s Top 10 national economy 10-year forecasts. No change in the top three… but the middle gets very interesting.

Good Investing,

by Jason Jenkins, Investment U Research

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