Can the world’s biggest emerging market weather a global slowdown?

While many Western markets have been on the slide this year, Brazil has held its own. It has gained around 33% in dollar terms from its mid-January low and the benchmark Bovespa index, having exceeded its December record last week, is marginally up this year. Brazil is now the world's largest emerging market, valued at $500bn, having eclipsed its sagging Chinese counterpart last week.

Investors have been impressed by the improvement in Brazil's macroeconomic fundamentals over the past few years. GDP growth should expand by 4.8% this year after slightly faster growth last year, according to Goldman Sachs. Brazil boasts a trade surplus and large foreign exchange reserves, external debt is falling, inflation has been tamed and interest rates are at record lows. Domestic consumption is gathering momentum amid rising wages; bank lending grew by an annual 27% in the year to December, and retail sales are expanding at their fastest pace in seven years, says Bloomberg.com.

There is ample scope for further growth, given that home buying and consumer lending markets are still "in their infancy", as Shares points out. Brazil is also being boosted by "one of the longest investment cycles in recent history", says Maya Bhandari of Lombard Street Research.

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Mounting interest in commodities is also benefiting Brazil. It is the world's largest iron ore producer and also mines gold, nickel, and uranium. It has its own oil and a thriving ethanol production sector. The country also boasts the most agricultural land in the world and is already the top exporter of coffee, soya beans, beef, chicken, orange juice and sugar. "No country is better-positioned to benefit from the agricultural boom than Brazil," says David Fuller of Fullermoney.com.

What's more, Brazil looks better placed than most to weather a global slowdown, says Bhandari. Not only has it got plenty of foreign exchange, but robust domestic demand is the dominant growth driver (consumption comprises 60% of GDP), so the business cycle looks "comparatively insulated from global swings". And Brazil's major raw materials, iron ore and soft commodities, could well hold up in 2008.

Brazil's iron ore giant, CVRD (which, along with oil group Petrobras, is an index heavyweight), has just pushed through a major price hike, while Goldman Sachs recently noted that robust demand in the agricultural sector "is likely to remain strong even under economic duress". Meanwhile, Morgan Stanley reckons that Brazilian earnings will expand by 21% this year, while the market, on a trailing p/e of under 15, compared to 15.9 for emerging markets as a whole.

Still, the bulls may be getting carried away, says Geoffrey Dennis of Citigroup. The market "continues to ignore risks of any sort". It's "inconceivable" that the world economy can ignore a US recession and Brazil looks vulnerable to an unexpectedly sharp global growth slowdown that would dent commodities because the market looks overbought and valuations historically high. Global markets overall are not discounting a US recession and there is a close correlation between Latin American markets and Wall Street, so another likely downleg worldwide is unlikely to leave Latin America unscathed. "This is not yet the big rebound," says Dennis.

In this context, it's worth noting that Friday's sell-off on Wall Street wiped over 3% off the Bovespa. While the long-term story remains compelling, investors may be in for a rocky ride this year.