Annelena Lobb has this report on the new king of emerging markets.

Brazil edged past China to become the largest emerging market in the world, as measured by Morgan Stanley Capital International’s emerging markets index. Brazil has a free-float market capitalization of $509.10 billion and comprises 14.95% of the index; China, $481.80 billion and 14.15%, respectively, according to MSCI, FactSet and Citi Investment Research.
Brazil has enjoyed a “meteoric” rise since mid-2007, said Geoff Dennis, Citi’s Latin America equity strategist; a report he wrote for Citi notes the role of market juggernauts like state-oil concern Petrobras in Brazil’s surge. Petrobras shares have rocketed over the last 12 months on the price of oil, as well as the discovery of the Tupi oil and gas field, 180 miles off the coast of Rio.

Chinese equities markets have also corrected lately, he notes, helping Brazil move into first place. Longer-term, Mr. Dennis notes that Brazil has risen relatively steadily since its trough in mid-2002, when it made up 5.3% of the MSCI index, and the two biggest fish were Korea, now third, and Taiwan, now fourth.

But they’ve underperformed and Brazil, a big exporter of commodities, has outperformed — Korea, Taiwan and China are all net commodities importers. “It all comes back to commodities,” he said.

In the near future, the run-up in Brazil probably leaves it vulnerable to profit-taking; Brazilian interest rates may also rise, Mr. Dennis said. Longer-term, oil, mining and other commodities will continue to boost Brazilian markets, he said, assuming any U.S. recession isn’t too painful. As for China, when its market is “less frothy,” it will “come roaring back – but I wouldn’t expect China to go racing past Brazil anytime soon.”