F&C's Larson comments on Brazil upgrade

Commenting on Standard & Poor's upgrade of Brazil to BB+ this week, Urban Larson, director for F&C Emerging Equities, said: "S&P's announcement demonstrates that confidence in the Brazilian market is growing with two out of the three major ratings agencies rating the country just one notch below investment grade.

"Brazil has built up a high level of foreign reserves and the public sector is now a net external creditor. This represents a substantial improvement in the level of risk that investors are exposed to in Brazil," said Larson.

"In mid 2002 many foreign investors thought Brazil was close to defaulting on its debt, which at the time was more short term and more closely linked to the dollar. The level of indebtedness of both public and private sectors was also much higher. But in the last five years Brazil has been able to take full advantage of a favourable global environment not only to improve its debt profile - by replacing shorter term dollar borrowing with longer term local currency debt - but also to reduce its leverage.

"Currently falling interest rates are very supportive of domestic consumption, while the continued strength of the Real also makes domestic stocks look more attractive than exporters," added Larson.

According to Larson, the debt upgrade has been particularly favourable for the banking sector.

"We like Itaú in this space. We believe it is the most sophisticated bank in Brazil, consistently generating a return on equity over 30%. The bank has also increased its lending at close to 25% a year. When S&P upgraded Brazil they also upgraded Itaú to investment grade (BBB-)."