Itau BBA Joins JPMorgan in Cautious View for Brazilian Equities

  • Brazilian bank says it's not the right time to buy stocks
  • Outlook for Latin American equities `unappealing' to JPMorgan

Banco Itau BBA SA says investors should stay away from Brazilian stocks for now as the economy weakens and the political crisis intensifies, joining JPMorgan Chase & Co. in outlining bleak prospects for Latin America’s biggest equity market.

With Brazil poised for its longest recession since the 1930s, corporate earnings will remain under pressure, while higher interest rates make it more expensive for companies to roll over debt, according to Carlos Constantini, global head of equities and fixed income distribution at Itau BBA. JPMorgan recommends clients to have a neutral position in Brazil as the outlook for Latin American equities in general seems “unappealing,” according to a Nov. 20 report.

“It’s not the right time to invest in Brazilian equities if you’re looking at the short term,” Constantini said in an interview in London. “The long-term investor sees value in Brazilian equities at this point, while the short-term investor knows there’ll be a better entry point.”

The benchmark Ibovespa stock index is on pace for its third year of declines as Brazil’s gross domestic product is expected to contract 3.2 percent in 2015 and 2 percent in 2016, according to estimates from economists surveyed by the central bank. Inflation has surged to double digits even as policy makers boost interest rates to a nine-year high, with the government struggling to implement austerity measures amid a corruption scandal engulfing some of the country’s biggest companies.

JPMorgan says “weak fundamentals” stop Brazil from being seen as an appealing investment case, citing the outlook for earnings and low visibility on the political front, according to the Nov. 20 report written by analysts including Emy Shayo Cherman.

"The improvement of Brazilian markets in 2016 greatly hinges on the unwinding of the dependence of economic developments from the political realm," Cherman wrote. JPMorgan’s forecast is for the Ibovespa to end next year at 52,300, an upside of 8.3 percent over Tuesday’s closing level.

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