RIO DE JANEIRO, BRAZIL – JP Morgan reiterated its recommendation of overweight (above market average performance) for Brazil and signaled that the country is among the best countries to invest in Latin America in 2020. Only Colombia was likewise recommended in the region.
“The December rally produced higher valuations, but also renewed optimism with a good idiosyncratic story that would work well from a better global perspective and a stronger macro environment,” said strategist Emy Shayo Cherman in a report.
According to the bank, the 2020 drivers are a continuation of those that guided Brazil in 2019: reforms, higher growth, and lower interest rates, which encourage greater investment in the stock market. “In short, 2020 has the potential to be like 2019, particularly considering the improved global perspective”.
Brazilian shares will continue to react to the advances in the government’s reform agenda following the passing of the Social Welfare reform, according to the bank.
“It is difficult to track and deal with the fiscal system issues, with the potential advance of tax reform. We think that sanitation and social welfare reform of the states could be finalized in the first semester, but the (October) municipal elections put an end to congressional activity in the second half of the year,” said the strategist.
The key, Emy continued, is to keep the agenda moving forward by keeping the pace and stance that a new macrostructure is being implemented.
According to her, privatizations help on this front (target of R$150 – US$38 – billion for 2020), as well as further advances in the trade agenda.
Regarding economic growth, the JP strategist believes that the country’s GDP should increase between two and 2.5 percent this year, above the forecast for 2019 (approximately one percent) and the best since 2013.
The main growth factors should continue to be consumption, credit expansion, and improved employment, although investment should also begin to rise.
“Interest rates are lower and so is the perception of risk, such as the Brazilian CDS, which is very close to its lowest level ever, dropping 100 basis points in 2019. This spurs a flight from fixed income to equities. This occurred in 2019, offsetting more than twice the redemption of foreign investors”.
Risks
The strategist cautioned that there are risks for Brazil, which “are typical” of all Latin America: a sudden shock that surprises the markets, coming from scandals, strikes, protests and/or resignations/changes of positions.
“These “black swans” often visit Brazil, and it is them who we should fear, considering that in 2019 they did not appear.”
“Brazil is not expensive, but we think there are some rich sectors: consumption and health – also to some extent the industrial sector. The financial sector has a premium of about 20 percent over emerging markets, but we don’t think this is excessive and there are opportunities in this area. We also find opportunities in Pão de Açúcar, Petrobras and Vale”, concluded the JP strategist.