SÃO PAULO—Brazil is booming amid a tectonic shift in global investing toward the developing world that has lifted its stock market, strengthened its currency and provided financing for new ports and World Cup soccer stadiums.

But while foreign investment is mostly a good thing, there are downsides. The abundance of cash has helped fund riskier bank loans and fueled a potential real-estate bubble. By some measures, the Brazilian real is now the world's most overvalued currency, and many local factories aren't competitive in global markets.

Daily life has become so expensive that movies, taxis and even a can of Coke cost more in São Paulo than in New York. Rio de Janeiro apartment prices have doubled since 2008, and office space in São Paulo is suddenly more expensive than Manhattan. In many cases, investment banks must pay their Brazilian bankers and analysts more than they would get doing the same job in New York.

Concern about the strong real is a key reason why Brazil's central bank late last month cut its benchmark interest rate by half a percentage point to 12%, reversing course after a year of rate hikes. The move risks spurring inflation and spawned a debate in Brazil on whether the central bank had succumbed to political pressure. But Brazilian officials say the country's high rates have lured speculative foreign investments that pump up the real and hurt the economy. Indeed, there are early indications that the Brazilian economy is beginning to slow.

Brazil's real has weakened 6% against the dollar since the central bank cut rates, but even so it is still up some 36% since Jan. 1, 2009. With the U.S. and Europe awash in economic gloom, global investors are on pace to pour more than $1 trillion into emerging economies such as China, Brazil and India this year—nearly a five-fold increase from a decade ago. The money is coming because emerging market economies have been the main drivers of global growth since 2009.