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Two Reasons to Try the Brazilian Stock Exchange

For Hugo Macias, who belongs to the Ecolatin network, it's significant that the Brazilian market will set the standards for global investors who want to enter South American stock markets. "The São Paulo market is strengthening itself much the same way as the ownership of the planet's most profitable industries is also becoming more concentrated. For years, financial transactions have exceeded the value of transactions made daily in 'real' global markets. Increasingly, financial centers send the signals that 'manage' the utilization of global savings. This stock exchange [Bovespa] is becoming one of those institutions; it is an important model that will determine the future of financial capital that enters the [Latin American] region."

It will also send a signal when it is time for capital to leave for other locations, Macias says. All you have to do is go out on the floor of the Bovespa market and you will see how the great global markets have taken positions in Bovespa's shares. NYSE Euronext has acquired ownership of 1% of Bovespa. Sources close to the deal told Reuters that NYSE Euronext, a joint U.S.-European company, has invested $90 million through that deal, acquiring approximately 1% of Bovespa's shares. Analysts say this purchase reflects NYSE Euronext's drive to expand its presence in Latin America.

However, the interest in Brazil doesn't stop there. CME Group, the world's largest futures market, agreed on Oct. 23 to purchase 10% of Brazil's Mercantile and Futures Exchange for a price of about $700 million. CME, headquartered in Chicago, will pay approximately 42 times multiple BM&F's projected earnings for 2009, according to Diego Perfumo, a former advisor to CME Group who now works at Equity Research Desk in Greenwich, CT. Experts believe that the high premium premium paid by CME in this deal helped Bovespa when its shares were issued. BM&F is the largest derivatives market in Latin America, and it, too, has announced plans to issue its own shares.

Goals and Challenges

Regardless of any possible corporate deals, the short- and medium-term challenge for the Brazilian stock market will be "to attract foreign capital and to professionalize," says Romera. One approach that would attract more investment from Europe and the United States would be to "facilitate entry through such initiatives as lower commissions for buying and selling shares." Another key goal, he adds, is to "create a market culture."

According to Fabian Hernando, "The future of Latin American stock markets must be characterized by the leadership of a great diversity of companies and investors. ... The market must offer them a wide range of well-structured instruments for satisfying their financial needs." Hernando adds that this will lead to "greater confidence in the market and, as a result, increased trading volume and appropriate transfers of risk and profitability in those stock markets. That, in turn, will make it possible [for Bovespa] to make significant improvements in its global performance."

Editor's note: The iShares MSCI Brazil Index (EWZ) is an exchange-traded fund exchange-traded-fund-etf (ETF) that tracks the performance of many of the companies that trade on the Brazilian stock exchange. To learn more about this ETF, check out "ETF Offers a Taste of Investing in Brazil."

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