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Investors see little price or profit upside for Brazil's major commodity exporters, but no one wants to bet against market momentum.

"Brazil is looking very expensive at these levels, but try to find me an investor who wants to go against this momentum play at the moment," said Sergio Machado, portfolio manager of boutique asset manager Vetorial in Sao Paulo.

Brazil's Ibovespa stocks index is heavily weighted toward basic materials and commodities exporters, with oil major Petroleo Brasileiro (PBR) and metals exporter Vale S.A. (VALE) the top two traded stocks by far.

When commodities like oil and base metals rise, investors tend to pile into emerging markets that are big commodity exporters. Brazil is at the top of the list.

Brazil is now a serious exporter of oil products and it is a major iron ore and steel exporter to China.

The rule of thumb for Brazil has been this: if commodities are rising and China is buying, then the Ibovespa trends higher as international investors are lured by the promise of tradeable natural resources and a large domestic market.

Brazil stocks have been on the rise all year. The iShares MSCI Brazil Index (EWZ) exchange traded fund is up 59.5% since Jan. 1.

In Brazil, the Ibovespa index is up 42.06% as of June 10. Out of the commodity exporters listed, only Vale has underperformed the index, up 41.7%. Among major steel companies, Companhia Siderurgica Nacional (SID) is up 78.7%.

"There is not a lot of value for commodity stocks at these levels given their run-up this year," said Mohamed Mourabet, director of Victoire Brasil Investments, a $235 million asset manager in Sao Paulo.

Commodity exporters have seen their stocks rise disproportionately when compared with locally driven companies. Bradesco (BBD) bank is up 32.8% since the start of the year, and telecommunications giant Oi (TNE), is up 12.52%, underperforming the market as a whole.

"Momentum favors Brazil and commodities. Brazil's commodity company stocks are closer to fair value than they are overvalued," said Carlos Parga, an equity analyst at Maua Investments, one of Brazil's biggest fund managers.

"China's basic materials demand is what's driving this rally. But when you look at the lows we saw in late 2008, you see that this rally is sustainable," Parga said.

But commodity price increases come with their own set of alarm bells. If oil prices rise too fast over the current levels of $70 a barrel, central banks could start raising interest rates around the world. Higher rates in the U.S. could eventually attract fixed-income investors into U.S. bonds.

Then there is the recovery scenario. If investors see the U.S. coming out from recession, money could start flowing back into U.S. equities as well, taking some action away from Brazil, said Tony Volpon, chief economist at CM Capital Markets in Sao Paulo.

For the moment, Brazil has become more than just a commodities play. It has become a momentum play as well for international fund managers.

"As the market rebounds, overseas stocks are going to become less correlated with the U.S., underscoring the importance of global equity over the next few months," said Geoffrey Pazzanese, portfolio manager of the $429 million Federated InterContinental Fund (RIMAX).

Pazzanese said he was recommending investors devote a core part of their international portfolio to "high quality" emerging markets like Brazil, China and South Korea.

-By Kenneth Rapoza, Dow Jones Newswires, 5511-2847-4541, kenneth.rapoza@dowjones.com