With all the volatility in U.S. equity markets, investors may have missed the Morgan Stanley upgrade of the Brazil market last Friday. The company's strategy team in charge of Global Emerging Markets (GEM) upped the Portuguese-speaking nation's equities to an Overweight rating from Equal-weight.

Morgan Stanley believes that valuations are attractive at current levels given the big improvements in Brazil's economic structure over the past few years. Using Morgan's internal metrics, the market is now trading 11.1 times forward estimates, which is a dip from 15.3 times (down 27%) a few months back and in-line with three-year average of 10.8 times.

The benchmark Bovespa index in Brazil has not been immune to the recent global market swoon. Since hitting an all-time high of 73,920 in late May, the index has sold off roughly 18%. The Bovespa is now trading 6% below the levels Standard & Poor's granted "investment grade" status to its debt.

However, Brazil is still faring much better than its emerging-markets brethren. As measured by readily tradable ETFs listed on U.S. exchanges, the iShares Brazil Index is still squeaking in with a positive year-to-date return of 0.4%. The other BRIC markets are down, with iShares China down 20%, The India Fund down 43%, and the Market Vectors Russia down almost 5%.

The bearish debate on Brazil surrounds the current interest-rate environment and how far the hiking cycle will go. In my opinion, the market has already priced in 250 basis points (bps) of additional hikes to take rates to 14.25% by December.

Yes, fears of an inflation spiral should be taken very seriously, especially in Brazil, where the inflation scourge of past decades still rings loud and clear. However, with an 18% down move in such a short time, I think the market has more than discounted these fears into equity prices.

I think now is the time to pick up shares of companies in this budding economy on the cheap. The market has sold off, but the fundamental story has not changed one bit. It is a great fundamental picture at discounted prices.

Of note, Morgan Stanley notes that GEM institutional investors are now in an underweight position in Brazil for the first time since 1999. Morgan uses a relative position weighting of dedicated GEM funds. At current levels, these funds are underweight by 1%-2%, with a low of 2.5% in 1998. I view this as a bullish contrarian signal, as there is a boatload of cash waiting on the sidelines. And any uptick in these markets will drive all the sidelined money into buying back in.

Where to start? Go with the goliaths -- Petrobras and Vale . These are the "go to" names when investors and institutions want Brazilian exposure, which I recently wrote about more in detail.

If you want to be more speculative, I wrote several weeks ago about Ultrapar and the oncoming consumer boom.

Of note on Vale is that last week, RIO priced a massive secondary stock offering. In fact, it was the largest stock offering in the history of Brazil, and it went off successfully. The company priced 256.9 million shares at a price of $29/ADR that netted the company $11.5 billion for its acquisition war chest -- my bet is on Alcoa , Freeport-McMoRan or Anglo-American .

The fact that the market was able to absorb such a large slug of stock is very bullish in my eyes. I am watching the $29 level on RIO as a good indicator of market strength.