"As the global economy began to shudder into recession, natural-resources prices-which had fueled the rise of leading Brazilian stocks -- crumbled. And inflation, which had been relatively tame, put pressure on the economy and led to very high interest rates (above 14%).

"The global recession has not passed by Brazil. Real GDP (which excludes the effect of inflation) is expected to fall from a robust 5.3% in 2008 to just 1.6% in 2009, according to Economist Intelligence Unit.

"It is a testament to the increasing affluence of a growing middle class and the aggressive moves of Brazilian president Luis Inácio da Silva, aka, 'Lula,' to strengthen the country's financial position that Brazil's economy is expected to continue to grow at all this year. From 2002 through 2008, the portion of Brazil's population whose incomes fell within a middle-class \range rose from 44% to 52%.

"President da Silva used Brazil's government budget surpluses earlier this decade to repay debt and has funneled money into infrastructure improvements and programs to reduce hunger and improve sanitation.

"Beyond 2009, the economic outlook is much stronger-and the stock market there could recover even this year. In fact, EWZ is holding up very well so far in 2009, as it is down only 1.5% through March 4.

"Growth in real GDPin Brazil is expected to rebound to 3.2% in 2010 and 4% the following year. Though not as strong as the estimated growth of China or India, Brazil'santicipated economic growth is actually quite impressive considering that its average personal incomes already dwarf those of its major Asian emerging-markets counterparts.

"Inflation is expected to remain moderate, but the central bank has kept interest rates at 12.75% in a bid to make sure. Unemployment spiked back up to 8.2% in January 2009 from 6.8% in December, but unemployment was as high as 8.5% as recently as April 2008.

"Given these advantages, EWZ'saverage price/earnings ratio of 11.4 is not high. Also, it may actually overstate valuation, since commodities producers (which make up about 55% of the portfolio) tend to have higher stock valuation ratios when earnings are temporarily low.

"Petróleo Brasileiro S.A. (aka, Petrobras) and Vale de Rio Doce dominate the portfolio. Petrobras also has one of the largest reserve bases in the world and has development and supply agreements with China, one of the world'smost voracious consumers of oil.

"Vale is the world's low-cost producer of iron ore and has become a leading global mining company. Vale also has important relationships with Chinese steel makers, for whom it is the largest provider of iron ore. So, both stocks should benefit significantly from growth in China.

"Financial-services companies account for the next-largest sector allocation. These companies should benefit in the long run from increased adoption of financial services and products by the middle class.

"Mortgages and credit cards, already ubiquitous in most of the developed world, are growth products in emerging markets like Brazil. And Brazil's banks have not required massive influxes of government funds to stay afloat.

"In total, the portfolio invests in 68 of Brazil's largest companies. Utilities (8%), consumer (6%) staples and telecommunications stocks (6%) are also present, with no other sector accounting for more than 3% of the portfolio. EWZ's expense ratio is 0.63%."

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