JPMorgan Downgrades Brazil Stocks Over Growing Fiscal Risks

JPMorgan became the second bank in just over a week to downgrade its recommendation on Brazilian stocks, citing a burgeoning budget deficit and the prospect of higher interest rates.

Strategists led by Emy Shayo cut Brazil to neutral from overweight. On Nov. 18, Morgan Stanley downgraded the asset class to underweight, citing the same risks.

The downgrade comes as the government keeps delaying the announcement of spending cuts, stoking concern over the timing and size of the package. They have left it so late now that Shayo says it will be difficult to get congressional this year. And by the time it gets approved, the spending measures will probably be watered down, she added.

“While there might be an effort to keep the lid on expenditures, this is today a very tough proposition considering the lack of general support in the administration,” Shayo said. “It would be too ambitious to expect structural changes that would allow for debt stabilization in the foreseeable future.”

JPMorgan also upgraded Mexican equities to overweight as it turns optimistic over the government’s budget plan and the nation’s ongoing easing cycle. While valuations appear very attractive and positioning light for both markets, Shayo said there are more upside ahead for Mexican stocks. 

“Mexico merits the benefit of the doubt,” she said.

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 at the start.”