By: Merryn Somerset Webb, 3 June 2008 | SPECTATOR BUSINESS

If you walk north from the charming tourist centre of the north-eastern city of Salvador, it isn't long before you see Brazil's new middle class in action. The narrow streets and town houses left behind by the Portuguese soon give way to wide commercial streets packed with people buying - not just looking at as they now do on our own high streets but actually buying - televisions, DVD players, children's clothes and fridges. Wander in and out of a few stores and you won't be surprised to hear that retail sales rose by an annualised 12.2 per cent in February.

Keep going north and you'll soon find yourself in Victoria, home to the most upwardly mobile members of Salvador society. Here, large apartment blocks overlooking the sea are going up every day and the streets are full of signs directing you to show homes and marketing offices, as well as ads for Pilates and hydro-massage sessions.

More evidence that there is plenty of money knocking around comes in the trip to the airport - every car brand you can think of from Nissan to Mercedes has a showroom along the way - while the airport itself should strike envy into the heart of passing Europeans. It is clean and bright, but perhaps more importantly, like all the other airports we passed through in two weeks in Brazil, it works: there are no queues at security or at check-in and all our flights left bang on time (until we attempted to take a Portuguese Airlines flight home that is).

So what's making the Brazilians so rich? The simple answer is that just as the economies of the West enter one of their most traumatic times for decades, Brazil's economy has hit something of a sweet spot. It is running a trade surplus of about $40 million a year, foreign reserves have grown to around $200 billion, the currency is strong (up 7.5 per cent against the pound in the last year alone), inflation appears to have been tamed and, at under 5 per cent, is well below the levels currently being seen in most developing countries, while GDP is running at a seemingly sustainable annual growth rate of just over 5 per cent a year. Brazil has also just seen Standard & Poor's upgrade its debt to ‘investment grade' to reflect ‘the maturation of Brazil's institutions and policy framework as evidenced by the easing of fiscal and external burdens and improved trend prospects'. This is particularly good news: not only is it external evidence that Brazil is more developed than developing, but it should mean that the cost of capital in Brazil gradually falls, something that will boost growth further. It brings great feel-good factor with it too: I bet the show-homes of Victoria are even more crammed with buyers than usual this month.

Much of this good news can be traced to the commodity markets. Brazil has nearly everything the rest of us want. It has a plentiful supply of fertile land and nearly a fifth of the world's fresh water, thanks to the Amazon basin. That means it has become one of the largest exporters of soft commodities: It is the world's largest supplier of everything from sugar and coffee to beef and chicken. It also means that it suffers from few of the energy-related problems the rest of us have to worry about: 80 per cent of its power is supplied by hydro-electric dams, with two large new projects under construction on the Amazon to cope with rising demand.

And it isn't just food and water that are making Brazil rich: it also has huge reserves of the hard commodities that are so much in demand from emerging Asia. It is one of the world's largest producers of iron ore and also has deposits of uranium, nickel, gold and platinum.

Even more interestingly, it appears to have a significant amount of oil: the state-run oil company Petrobras recently announced a huge find in the Carioca field off the coast of Sao Paulo. The latest find, should it work out - should the oil actually be there and recoverable in volume - could make Brazil one of the world's largest oil producers. Even without Carioca, Brazil has an estimated 12 billion barrels of oil reserves, putting it second only to Venezuela in terms of potential production in South America.

Still, before you rush in, note that Brazil is not perfect. Land title can be dodgy, corruption is far from banished from the public or private sectors and labour laws are so inflexible that few employers hire all of their work force legally. There is also the risk that the commodity prices that have done such great things for the country could undo a lot of that good when they finally fall. However, while many commodity prices may now be in ‘melt-up' - rising faster than is justified by market fundamentals - the basic supports for the bull market aren't going away.

The middle classes across the emerging world are going to continue to grow, as is the global population, so the demand for oil, for most hard commodities and certainly for agricultural products, is going to continue to bump up against a relatively limited supply - all to Brazil's benefit. More worrying for anyone investing with a short-term view is the simple fact that the Brazilian market has risen sevenfold since 2002 alone. Brazil is a fabulous long-term choice for investors, but given its recent rise, it is vulnerable to all sorts of short-term shocks, particularly as it isn't properly cheap any more: on a p/e of just over 12 times, the market is trading well above its historical averages. I have the London listed iShares MSCI Brazil ETF in my own portfolio, but I'll be looking for a moment of market weakness - perhaps when the oil price finally tanks - before I top my holding up.

I'd also be looking for a moment of market weakness before I go on holiday to Brazil again. The ongoing strength of the real means that right now it doesn't come cheap. A good hotel room will set you back £150 a night, dinner doesn't cost much less than in London (nor, for that matter, does a Pilates class), and a flat on the coast these days will probably cost you more in Brazil than it would in Miami Beach. Next year I'm going to Florida.