Brazil’s stock market will outshine its Latin American peers in the second half of the year due to still weak valuations and prospects for lower rates, according to JPMorgan Chase & Co.
The actions of the country are “the simplest bet there is due to low ratings combined with lower rates”said Emy Shayo, head of equity strategy for Latin America at the bank. “The story is becoming even more interesting amid a larger-than-expected decline in inflation as inflation expectations begin to ease and growth expectations rise,” she wrote in a report released Friday.
Shayo maintained his overweight rating on Brazilian stocks and now expects the benchmark Ibovespa stock index to end the year at 135,000, around a 13% above the close on Thursday. A gauge of Latin American stocks is expected to rise nearly 5% in the same period, he added.
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The opinion follows bullish bets from investors, including Fidelity Investments and some local hedge funds, which have been signaling a potential turning point in the country’s stock market. Even with a 9% advance this year, the Ibovespa is selling at 8.1 times future earningscompared to 12.2 times the Mexican Mexbol index and below historical averages, data compiled by Bloomberg show.
Swap traders expect more than 180 basis points of monetary easing by the end of the year, and Verde Asset Management said the central bank led by Roberto Campos Neto could start cutting rates in August.
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Why did the shares go up?
Brazilian assets got a boost this week after S&P Global Ratings upgraded the South American nation’s credit outlook to positive from stableciting better visibility of monetary policy and lower likelihood of reform setbacks.
“Relaxation is just around the corner”, Shayo wrote. “It would also do wonders to curb residual political noise around economic policy.”
