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Brazil may lure high-yield investors fleeing Mexico

BRASILIA: Brazil could be the most overlooked winner from Mexico's passage to investment grade status as the South American giant takes over as the region's most promising market for high-yield investors, analysts said on Monday.

As Mexico leaves behind the pack of Latin American markets offering investors larger and riskier returns on their debt, analysts believe emerging market funds will flock to Brazil's liquid and high-yielding market.

"As Mexico becomes investment grade, the yields are going to come down. So if you want something like nine or 10 percent returns, you're going to have to look elsewhere," said Walter Molano at BCP securities.

"And where is elsewhere? It's Brazil."

Brazil's swift rebound from a currency collapse early last year has already drawn a tidal wave of foreign capital. Foreign direct investment in Brazil last year reached $30 billion, the fourth highest in the world and the second highest amount in the emerging markets universe behind China.

Analysts credit prudent fiscal and monetary reforms for wooing back foreign investors, who watched Latin America's biggest economy beat out doomsday scenarios last year by keeping a lid on inflation and eking out 0.8 percent growth in gross domestic product despite gloomy forecasts for a 6 percent contraction.

Last week's upgrade of Mexico by Moody's Investors Service to a Baa3 rating may now force emerging market funds to underweight Mexico as spreads narrow, and to go even more overweight on Brazil, rated at B2 with a stable outlook.

Analysts said with Chile already at investment grade and Argentina still struggling to shake off a severe recession, Brazil becomes the logical option for investors seeking liquidity, high returns and stable economic outlook.

"You have displaced funds that have to find a home (and) there is a comfort level with Brazil," said Siobhan Manning, Latin American debt strategist at PaineWebber in New York.

But by no means will Mexico's upgrade cause it to lose investments as speculative capital trickles down to Brazil. Mexico's new status should widen its pool of potential investors by erasing restrictions some funds faced on the percentage of money they could place in speculative assets.

Further, Mexico's upgrade, which goes into effect on April 1, will prompt funds which track investor-grade indices, like Salomon Smith Barney's, to boost their portfolios of Mexican debt.

But Manning said that when this new wave of capital floods into Mexico, spreads will compress even further -- to levels that will force out investors seeking higher returns.

"On April 1, when you see Mexico placed officially into these Salomon Smith Barney indices, (emerging market funds) will increase their overweighting on Brazil," Manning said.

She expected speculative capital to make a substantial move south within the first two weeks of April.

Further aiding Brazil is speculation it too may receive a Moody's upgrade this year, moving it toward an investment grade rating and further sweetening investor sentiment.

Moody's said earlier this month that the major factor preventing an upgrade for Brazil was a high debt-to-exports ratio, which stands at 360 percent with a debt-service ratio of 57 percent.

Analysts believe if world commodities prices improve or if Brazil can hike the volume of its exports, as Mexico did following its devaluation, Brazil could narrow the debt-to-exports ratio and possibly win an upgrade this year.-Reuters