Tags: Currency | Buffet | Would | Own

A Currency Even Buffett Would Own

By    |   Tuesday, 06 May 2008 02:20 PM EDT

Brazil has come a long way, baby! Back in the 1980s, it defaulting on its debt and the currency, the real, was a laughingstock.

Even in the 1990s, Brazil was still so strapped with debt that no one really considered a bond, stock or currency investment there anything but pure speculation.

Roll forward to today and Brazil looks very different.

For starters, Warren Buffett owns this currency. When the conservative, long term holder from Omaha owns a currency, you know he sees a great future for a very long time. After all, as he says, he's not a trader and he doesn't hold things for months. (His favorite holding period is "forever," he says.)

In fact, "short term" to him is probably 10 years at least.

So that alone ought to get a person seriously considering this currency. But it gets much better. In fact, at the end of April, Standard and Poor's upgraded the country to investment-grade status.

What's the big deal about that? Well, many funds aren't allowed to invest in just anything they'd like to. They are restricted from speculative plays, for instance. So they strap on these rules about investments actually needing to be investment grade.

That means another huge round of cash can flow into Brazil. Institutional money managers and pension funds are salivating to have a go at this "BRIC" (for Brazil, Russia, India, China) investment. The BRIC countries are considered by some to be future economic superpowers, emerging markets that are so large that their coming development will reshape the global economy.

The present commodities boom, too, has really put the wind to Brazil's back.

Once, Brazil had to import all of its oil. These days the state-run oil company, Petrobras (which also has an investment grade rating), has made some very large offshore finds. Brazil used to talk about being self-sufficient on energy; now it wants to join OPEC!

However, it's not just oil that's helped. Brazil is the world's largest producer of iron ore, coffee, and sugar. They're a major exporter of soybeans, pork, beef…you know, all that stuff commodities guru Jim Rogers says to buy.

These exports are well diversified. It sells a lot of iron and food to China and the rest of Asia, and to Europe. That means Brazil isn't dependent upon the U.S. to stay afloat (like, for instance, Mexico). So the country has been in some pretty good shape throughout the current U.S. slowdown.

As for the upgrade, investors didn't waste much time upon hearing the news. In fact, on the day of the announcement, the Brazilian benchmark stock index, the Bovespa, surged 6.3 percent and hit an all time high of 67,868.

That puts their market up 13.8 percent so far this year in dollar terms when many stock indexes are down or have just single-digit gains.

Now let's talk currency. Heck, it has gained 22.4 percent over the past 12 months. That's the biggest gain of all of the top 16 major currencies in the world. How's that for strength?

If you're wondering if their stock market and currency have topped out, consider this. There's a second wave of money that doesn't normally invest in anything without a second ratings agency giving it investment-grade marks.

Large institutions that collectively have $2.3 trillion dollars in play use the Lehman Aggregate Bond Index as their benchmark. That requires two rating services to give an investment-grade rating before they'll even touch it.

So, once Moody's or Fitch follows suit (Fitch has Brazil under "active review" now), you'll see another wave of money pour into both the stock market and the currency, the Brazilian real.

The nice thing about investing in the Brazilian currency is that's the first place money has to go in order to get to their bonds or stocks.

Just like when foreigners invest in U.S. bonds or U.S. stocks, investors first have to sell their home (foreign) currency and exchange it for dollars. That means they're buying dollars no matter whether they buy real estate, a company, stocks or bonds.

Same with Brazil. You don't have to figure out where the money will ultimately end up as an investment. You just know that it will be first in the real, their currency.

By the way, it wasn't just the country that got the upgrade on April 30 but also nine of their banks too. So you can tell that Standard and Poor's really gave this country a huge vote of confidence. After all, they don't upgrade and downgrade whole countries every day.

Once a rating is given, it's usually kept for quite some years to come. Get ready to own the Brazilian real before that second wave of investment money pours into it like a tidal wave.

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Brazil has come a long way, baby! Back in the 1980s, it defaulting on its debt and the currency, the real, was a laughingstock. Even in the 1990s, Brazil was still so strapped with debt that no one really considered a bond, stock or currency investment there anything but...
Tuesday, 06 May 2008 02:20 PM
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