Morgan Stanley maintains a neutral view on Brazil but increases exposure to stocks sensitive to the fall in interest rates

By Lara Rizério

Morgan Stanley maintained equalweight (in line with the market average, equivalent to neutral) exposure to equities in Brazil within the bank’s Latin America portfolio while raising the region’s portfolio exposure to interest rate-sensitive Brazilian assets.

“In Brazil, we believe that the new fiscal framework proposal presented by the Brazilian Executive at the end of March opens doors for a potential mini monetary easing cycle in the country in the second half of 2023,” point out strategists Guilherme Paiva and team.

The day before, it should be noted, the government took the most detailed proposal of the framework to Congress.

Among the Brazilian stocks that entered the portfolio were Rumo and Localiza, while Porto and Vibra were excluded.

The strategists included Rumo because of the new tax structure proposal presented by the Executive and the likely increase in tax revenues from the upcoming tax reform should open the door for a potential interest rate reduction scenario (even though considered “mini” by the bank) in the second half of the year, in addition to having the prospect for a reduction in long-term real interest rates.

“Therefore, we would like to add exposure to high-quality interest rate sensitive names,” they assess.

In addition, the bank’s analysis team has a positive view of the paper due to the favorable outlook for long-term grain production and export growth.

Regarding the inclusion of Localiza, besides adding exposure to high-quality stocks that are more sensitive to interest rates, the bank sees that the company has a robust competitive position post-merger and possibilities for positive synergies with the integration with Unidas.

The stock also trades at multiples below its historical average.

On the other hand, strategists cut Porto and Vibra from the portfolio by gradually increasing exposure to stocks that should benefit from lower interest rates in the country.

Besides Rumo and Localiza, other companies with interest rate exposure in the portfolio are Iguatemi, Assaí, and Equatorial.

In Brazilian stocks, strategists in Latin America also have exposure to exporters leveraged in reopening China. They are Vale, 3R Petroleum, and WEG.

In Latin America, Morgan points to liking stocks from Chile and Mexico and the technology, consumer discretionary, and real estate sectors.

The bank is overweight (above-market exposure, equivalent to buying) on Mexico, with a constructive view for 2023 based on the assumption that the country’s link to the US and structural industry catalysts should benefit from improved US economic activity in 2024.

Regarding Chile, Morgan has a constructive view based on a new economic cycle in late 2023 due to lower interest rates and inflation and a more moderate approach to the reform agenda.

In addition to Brazil, Morgan is also equalweight in Peru, assessing that the country’s high exposure to commodity prices should benefit from the ongoing reopening of the Chinese economy and lower levels of social unrest.

Finally, they are underweight (below-average exposure, equivalent to selling) on Colombian equities as they are concerned about possible heterodox macroeconomic policies and intervention in the energy, healthcare, and pension sectors.

With information from InfoMoney