JPMorgan Sees a ‘Healthy Pause’ After Stellar Rally in Brazil Stocks

(Bloomberg) -- Brazilian stocks may be ready to take a breather, JPMorgan said, as the resumption of activities in Congress may pave way for an interruption in the market rally as traders assess the likelihood of pension reform approval this year.

“We would think that after a stellar performance both in 2018 and YTD, it would be time for a healthy pause, especially now that Congress has reopened and noise is likely to rise,” JPMorgan strategists led by Emy Shayo wrote in report from Feb. 3. Still, the bank reiterated its overweight rating for Brazil.

Brazilian stocks have added 18 percent since the first round of last year’s presidential elections. President Jair Bolsonaro’s administration has been pledging to pursue a pro-business agenda, including the overhaul of Brazil’s social security system.

JPMorgan’s base case scenario sees the country’s equity benchmark Ibovespa index ending 2019 at 106,000, while its bull case scenario sees it at 124,000 -- signaling an upside potential of up to 28 percent. The benchmark index added 15 percent last year, and has gained 11 percent so far this year.

JPMorgan economists attribute a 80-percent chance that the new administration will approve at least a modest pension reform, but expects the government to face difficulties negotiating support for the reforms, particularly in the Senate.

“The devil will be in the details and execution risk remains on everyone’s mind,” economists led by Cassiana Fernandez wrote in a separate report from Feb. 3.

©2019 Bloomberg L.P.