JPMorgan became the second bank in just over a week to downgrade its recommendation on Brazilian stocks, citing a widening budget deficit and the prospect of higher interest rates.
The strategists led by Emy Shayo reduced Brazil from overweight (above price) to neutral. On November 18, Morgan Stanley downgraded the asset class to underweight (below price), citing the same risks.
The downgrade comes as the government continues to delay announcing spending cuts, raising concerns about the timing and size of the package. The delay was so long that Shayo says it will be difficult to get Congressional approval this year. And when it passes, the spending measures will likely be watered down, she added.
“While there may be an effort to maintain control over spending, that is a very difficult proposition today considering the general lack of support in the administration,” Shayo said. “It would be too ambitious to expect structural changes that would allow debt stabilization in the near future.”
JPMorgan also raised its rating on Mexican stocks to overweight, as it is optimistic about the government’s budget plan and the easing cycle underway in the country. While valuations look very attractive and positioning is light in both markets, Shayo said Mexican stocks have more upside ahead.
“Mexico deserves the benefit of the doubt,” she said.
READ MORE: Brazilian banks beat foreigners and solidify leadership in the private credit market
On Donald Trump’s tariff threats, JPMorgan continues to see low risks of a broad import tax on Mexico, saying his latest comments on imposing a 25% tariff on imports from Canada and Mexico removed the “ elephant in the room right from the start.”
