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Though some Brazilian investors have already started buying volatile shares that may benefit from lower interest rates, Deutsche Bank (DB, DBK.XE) recommended Wednesday that investors stick with defensive stocks.

Brazilian investors have begun buying interest-rate sensitive stocks such as homebuilders and retailers, but Deutsche said it was cautious about adding too many of those volatile companies. Instead, the bank suggested buying high-dividend yielding stocks such as phone companies or companies with interest-rate linked debt such as industrials Iochpe Maxion (MYPK3.BR) and Weg (WEGE3.BR) or railroad operator ALL America Latina Logistica (ALLL3.BR).

Banks may also be a good bet as lower interest rates diminish concern about deteriorating asset quality, wrote Deutsche Bank strategists Frederick Searby and Francisco Schumacher.

Brazil's central bank will meet after markets close Wednesday to set the benchmark interest rate. Most economists expect the rate to stay steady at 12.5% after five consecutive increases, and some say there is already room for rate cuts later this year.

The Deutsche strategists said there is little concern about a current credit bubble, thanks to a low ratio of credit and mortgages to GDP as well as conservative reserve requirements that can "cushion any credit deterioration." Nevertheless, the strategists warned that rapid credit expansion in the country could pose a risk should the global economy have a hard landing, especially since many Brazilian loans are to first-time borrowers.

"Many locals feel quite convinced that 2008 was a salutary stress test that helped expunge market excesses," they wrote. "We continue to argue that the supercycle in commodities is vulnerable and that a hard landing in China would mean a deterioration in the terms of trade, a correction in the strong currency, and a greater hit to the economy than many expect."

-By Paulo Winterstein, Dow Jones Newswires; 55-11-3544-7073; paulo.winterstein@dowjones.com