JPMorgan Sees 20% Rally for Brazil Stocks on Shift to Value

(Bloomberg) -- JPMorgan Chase & Co. says Brazilian stocks will climb to record highs by the end of next year as a global economic recovery boosts the allure of undervalued companies.

“Brazil is the top candidate to outperform” in Latin America next year, Emy Shayo, the firm’s head of equity strategy for the region, said in an interview. “We expect growth to pick up and the U.S. dollar to slightly weaken globally, providing room for value stocks to keep rallying.”

Shayo forecasts the benchmark Ibovespa index will end 2021 at 134,000 points, or about 20% above current levels, amid a strong recovery in earnings. The gauge is poised to benefit from a continued shift away from tech companies toward cyclical and so-called value stocks, such as the lenders and commodity-linked firms that have a heavy weighting on the index.

Brazil’s stock market posted its biggest monthly gain since 2016 in November as foreign inflows accelerated and progress on the development of a coronavirus vaccine shored up a rally in emerging-market equities. Year to date, local equities are still down 26% in U.S. dollar terms, dragged lower by lingering fiscal concerns that have hit the real.

Shayo’s end-of-2021 forecast for the Ibovespa is the highest released so far among major firms -- Morgan Stanley is predicting a gain to 120,000, while BofA and Bradesco BBI see the gauge climbing to 130,000. JPMorgan had originally estimated the Ibovespa would end this year at 126,000, then slashed its outlook to 80,500 in the early days of the pandemic before raising it again to 104,000.

While the global backdrop will support Brazilian stocks next year, Shayo is less confident in local developments. Measures to shore up the country’s fiscal situation have been sidetracked by efforts to offset the pandemic’s economic impact, and it isn’t clear if the government will comply with rules meant to ensure public expenditures don’t increase more than the previous year’s inflation rate.

“The fiscal debate will likely continue,” Shayo said. In the meantime, she’d like to see progress on issues including a bill that would mandate spending reductions in case of a fiscal emergency.

She said it’s even possible that the Ibovespa could shoot up to 150,000 next year, but it would take a pickup in gross domestic product and more aggressive efforts from lawmakers to put investors at ease.

“Brazil would need to deliver more than what we currently expect on the reform front, coupled with stronger-than-expected growth,” she said.

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