JPMorgan Sees ‘Virtuous Cycle’ Propping Up Bullish Brazil Stance

(Bloomberg) -- The recent drop in Brazilian stocks isn’t enough to faze JPMorgan Chase & Co.’s head of Latin America equity strategy, Emy Shayo.

"We see a virtuous cycle taking place in the country, where you have tighter fiscal policy and easing monetary policy," Shayo said in an interview. "This combination attracts external capital and helps companies to recover a lot of what they lost in terms of profits. Growing corporate profits is the main driver for Brazilian stocks," she said.

The bank reiterated its overweight rating on Brazilian stocks. It sees the benchmark Ibovespa index ending the year at 105,900, as the government begins negotiating with Congress on pension reform which is seen as a key issue in tackling the country’s budget deficit. The index closed at 98,026 on Monday.

On the macroeconomic front, subdued inflation and slow economic growth have allowed Brazil’s central bank to keep the benchmark interest rate at historical lows. Some hedge funds are starting to bet rates could go even lower.

After a "healthy pause" in the rally, investors are likely to remain focused on the "ups and downs" of the social-security reform discussions, according to Shayo. In February, the index pared yearly gains. "We expect the bill’s progress to be slow in Congress. And we think it may be too difficult for the government to approve the pension reform in the lower house in the first half of the year."

JPMorgan has a favorable view on Petroleo Brasileiro SA, thanks to higher oil prices, expected asset sales and good pricing policy, Shayo said. The bank also likes financials, Rumo SA, Localiza Rent a Car SA, Equatorial Energia SA, Cia Brasileira de Distribuicao, Cyrela Brasil Realty SA Empreendimentos e Participacoes and Lojas Renner SA.

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