LOS ANGELES (ETFguide.com) - While China and India get the bulk of attention as B.R.I.C. nations (NYSEArca: BIK), it's Brazil that has shown the most promise. Through the March 24th market close, the iShares MSCI Brazil fund (NYSEArca: EWZ) has climbed roughly 15%. We are enthusiastic with Brazil's multi-facted potential.

While chasing returns is not a promising strategy, examining Brazil’s larger macro picture is encouraging.

Brazil stands to emerge from the global downturn in a stronger position than much of the developed world. Here is our reasoning; Inflationary pressures are to Brazil’s advantage The talk of inflation, a weak U.S. dollar and slowly rising oil prices boost the demand for and value of Brazil’s resources. Materials, energy and agriculture comprise approximately 50% of EWZ's holdings and roughly 21% of Brazil’s exports.

Then too, there's the eventual impact of stabilization in world economies. 

As the global economy regains its footing and existing energy exploration projects are put on hold, we expect to see inflationary pressures pushing oil and materials prices higher. In this environment Brazil is well positioned to benefit from such increases.

Banking on Oil and Banks

The somewhat recent discovery of the Tupi oil field is touted as the biggest since Kazakhstan in 2000 and the largest deep water discovery thus far. With Petrobras (NYSE: PZE), a state-owned enterprise and a foreign-friendly business environment, Brazil is genuinely more capable of efficient and productive extraction than many of its neighbors.

Bank strengths, interest rates and room to cut Brazil’s central bank rate remains high, above 11%. However, the Central Bank still has significant room for reduction. Inadequate credit may cap domestic inflation pressures to some extent, enabling the rate to revert to lower levels. While Brazil is unlikely to match Western level interest rates, there is room for rapid cuts such as those seen on March 11, when rates were slashed by 1.5%.

As in other regions, Brazilian bank lending has slowed, yet it has some of the most well capitalized banks in the world. They were helped by massive inflows of commodity dollars and enormous bank spreads. Thankfully, the banks did not need to take excessive risks through structured debt as they were already profitable. Heightened bank regulation stemming from the mid-90’s inflation crisis also contributed to this result.

Food for Thought

Agribusiness and food prices are favorable. 

According to Potash (NYSE: POT), the global agribusiness firm, Brazil remains headed for a continuation of steady agricultural growth by late 2009 and 2010. The reduction in the global value of the Real, Brazil's currency, has increased profitability for farmers selling abroad and will likely continue in their favor. Higher oil prices and steady emerging market food demand, thanks to China (NYSEArca: FXI), their second largest trading partner, continue to support Brazil’s agricultural markets and prices.

Although world food prices are off their highs, they remain nearly 30%-50% above their decade averages. Agriculture comprises approximately 8% of the nation’s GDP and employs nearly one-fifth of the nation’s workforce.

Public Spending Growth as Election approaches 2010 is an election year and Brazil continues to have a large, albeit declining, debt surplus. Traditionally public spending increases in election years. We expect social programs and infrastructure improvement to benefit

Final Thoughts

Even with the bright outlook indicated above, nothing is perfect. Undoubtedly, Brazil’s exports will slow, specifically transport equipment, their largest export (12.5% of exports in 2007). Politics is another consideration. 

Social angst may make it more difficult for the existing ruling party to stay in power. President Lula da Silva who has been a strong force behind a developing Brazil, will be replaced when he completes his maximum allowable term. GDP estimates are wide, with private estimates showing a slight potential contraction. Nevertheless, increased state bank lending and monetary easing will likely mitigate this trend.

Overall, our research at ETFdesk.com shows EWZ moving higher, as Brazil becomes a more advanced and a resilient developing economy.

Thomas Schumacher is the Chief Strategy Officer at ETFdesk.com. His views do not necessarily represent that of ETFguide or Yahoo Finance.