Horacio Marquez says the credit crisis is giving investors another chance to profit from Brazil’s long-term success story. The country is rich in natural resources, has a solid banking system, and a strong economic outlook. He recommends buying the iShares MSCI Brazil Index (NYSE:EWZ) in increasing increments over the coming 8 weeks.

This from Money Morning:

Brazil’s economy has been given a second chance. And so have prospective investors.

Brazil will use that second chance well – shouldn’t we?

Although there are a number of ways to play this promising “BRIC” (Brazil, Russia, India and China) market, including some excellent companies, the best way to capitalize on Brazil’s terrific prospects is through the iShares MSCI Brazil Index (NYSE: EWZ).

Brazil’s Shrewd Game Plan for the Current Financial Crisis

Vale (ADR NYSE: RIO), formerly known as Companhia Vale Rio Doce, is the largest exporter of iron ore in the world. It has thrived and continued to expand production of this critical resource, supplying China, Japan, Europe and other major global steel-making operations.  The story behind Petrobras Energia Participaciones SA (ADR NYSE: PZE) is even more impressive: After decades of government initiatives focusing on oil self-sufficiency – which includes deep-sea drilling and the now-vaunted sugar-cane ethanol program – Brazil achieved that goal last year. Now, with the biggest oil discoveries in the world in decades, Brazil is well on its way to becoming an oil superpower.

As President Lula said, “God has given Brazil one more chance.”

And us, as well.

Late last week, Brazil’s hopelessly mismanaged neighbor, Argentina, had to seize its privatized pension fund money in order to meet its fiscal obligations. We’re also watching as Hungary, Belarus and the Ukraine approach the International Monetary Fund (IMF) for help.  This directly contrasts with Brazil, which has amassed $200 billion in foreign reserves, having become a net creditor of the world.

So, in this crisis, both the Central Bank of Brazil and the Brazilian government have acted very quickly to backstop the liquidity effects against their banks.  The Central Bank of Brazil has been continuously superbly managed, despite changing administrations: and is very experienced in crisis management. It is currently managed by Henrique Meirelles, a highly experienced and greatly respected international banker. Meirelles has operated in the tradition of Brazil’s inflation-fighting central-banking pioneer Gustavo Franco.  Franco was one of the economic advisers who put together the Plano Real, which brought Brazilian inflation down dramatically under former President Fernando Henrique Cardoso. Franco was followed at the Central Bank by Arminio Fraga, formerly associated with George Soros in the Quantum Fund, and finally by Meirelles, who was formerly with Fleet Bank.

It’s important to note that the Lula administration has many officials who have previously held senior positions with major international banks.  This is a clear indication of professionalism, transparency and commitment to serious macroeconomic and monetary policy management.  No more “brincadeira” – playing around.

President Lula went on to say that the government will buy bank stakes in order to shield its financial institutions from the global crisis.  This is happening today, as the government’s largest banks have been authorized to buy stakes in Brazilian banks.  Much like the U.S. Federal Reserve has done in here in the United States, the Brazilian Central Bank also has been authorized to enter into swap operations with other central banks in order to restore liquidity to the Real, which has been under pressure.

To add further liquidity, the Brazilian Central Bank has reduced minimum reserve requirements for the banks, extended an almost $2 billion line to the banking system to finance exporters and injected some $71 billion to ease liquidity.  The Central Bank explicitly requires the banks to lend the money and monitors closely their activities to prevent them from instead using the capital to buy – and sit on – government bonds.

The Brazilian Central Bank also has had to resort to selling only about $23 billion of its more than $200 billion in total reserves, in order to cushion the decline of the Brazilian Real. The upshot: Brazil today operates from a position of macroeconomic strength, like China, India and Russia.

And the Central Bank has stimulated housing by easing liquidity requirements and encouraging banks to lend more.  This policy will soon gather more strength. Similarly, the government banks, rather than international investors, are the most likely to finance a huge electricity project coming for bid. And Brazil’s plans for a major infrastructure build-up should not have problems obtaining financing.

For example, Petrobras should easily be able to finance the estimated $163 billion needed over five years to continue developing its ambitious mega-oil project out of its own cash flow, government and bank financing and profit-sharing arrangements where it chooses.   Vale and other major exporters should likewise have little difficulty in moving forward. These companies, like the government, are committed to continuing with their long-term investment plans, despite the current problems.

Nor have Brazil’s market-supporting measures stopped there. Brazil has required all companies to report their derivatives positions and even to estimate future potential losses under certain scenarios on a quarterly basis, starting immediately.  This will greatly increase transparency, dispel fears and increase confidence.  Some companies saw their currency derivatives positions get hit hard in the recent sell-off.  But these hits, which in some notable cases wiped out the quarter’s profits, are a one-time effect, so it represents a buying opportunity in those stocks.

Finally, the Brazilian banking system is sound, with strong capitalization and low delinquencies.  Credit expansion has been strong in the recent years, but not overdone.  And banks like Spain’s Banco Santander SA (ADR NYSE: STD), government banks and others are taking advantage of the crisis to buy loan portfolios from their weaker rivals, as has been the case in most liquidity crunches in emerging markets.

The critics will refer to this crisis as the first major test for Lula.  And many doubt whether he will resist the temptation to throw monetary and fiscal prudence out the window.  But Brazil, as has been seen for decades, is much more than just Lula.  Its technocratic administration and central bank have decades of experience in crisis management. Brazil’s strong local companies, which are world leaders in many industries, and committed investors, including major multinational companies, are heavily vested in the country’s success.

Going for Growth

As the Brazilian government has done in the past, I expect it to stay the course for the long term, to maintain its inflation-targeting discipline (as the Central Bank recently announced), and stimulate its economy as inflation drops markedly. That will keep Brazil in the running to be one the engines of growth in the world for the next couple of decades.

As we’ve seen, the country’s prudent monetary and fiscal policies, coupled with its solid macroeconomic position, strong reserve position, and controlled inflation will lead to good growth. Gross domestic product  (GDP) is expected advance at a rate of between 4% and 5% next year. And since only 13% of GDP comes from exports, Brazil will have lots of room to maneuver.  The slowdown in the advanced economies will give Brazil – as well as India, Russia and other emerging economies – room to start cutting domestic rates as inflation abates, just as China is doing right now.

In China, savings are 10% of GDP more than investment, so a slowdown in foreign capital inflow to China is a blessing, since it will allow the Beijing government to deploy its own capital to work and increase China’s internally driven growth as opposed to export-driven growth.  The same phenomenon will be pervasive throughout the emerging markets that – like Brazil, India and China – have not squandered their newly found wealth.

Hence, at the current prices, Brazil is – if you’ll pardon the Wall Street slang – a “screaming buy.”  In fact, as we speak, foreign investors are flying in droves to Brazil to buy beachfront property at a discount.  Prices of financial and real assets have been hit by excessive fears of a Global Depression.  When you see that G7 nations have injected more than $3 trillion into their economies in order to backstop the credit crunch, and another economic stimulus plan in the United States is almost a given, you have to realize that this will have an enormous positive impact on the fragile global market situation we are seeing today.  As the credit markets thaw out, despite ongoing hedge fund de-leveraging, we will see renewed waves of buying and Brazilian financial assets will be amongst the biggest winners.  Do not be left to watch from the sidelines as I once was.

Recommendation: Buy iShares MSCI Brazil Index (NYSE: EWZ) in increasing increments over the next eight weeks.  This means that you will be increasing the amount of money deployed every week, until you’ve invested the total amount that you’ve set aside for this ETF purchase, just before the year comes to the end of the year.

PS. This is a cut version of Horacio’s popular ‘Buy, Sell or Hold’ column, published every Monday on Money Morning. For a more in-depth report on Brazil, follow the link below.

Source: Buy, Sell or Hold: iShares MSCI Brazil Index