SAO PAULO: JPMorgan Securities raised its recommendation on Brazilian equities to "neutral" on signs that the country's economy is turning friendlier to businesses and less lax with inflation.
According to a team of strategists led by Emy Shayo Cherman, Brazil's stock market underperformed rival emerging equities markets since April 2012, because of erratic government policies that favored consumer-oriented sectors at the expense of others. The strategists also cited increased price pressures coupled with slowing growth - a phenomenon widely known as "stagflation."
Shayo and her team said that international investors have cut exposure to Brazilian stocks since September. Still, "the recent improvement in policy environment could drive a rapid covering of short positions," the strategists said in a client note.
The decision underscores the impact of government actions on investors' perceptions at a moment when Brazil is losing room to smaller emerging market nations in the mindset of global investors. The Bovespa stock index has shed about 5 percent this year partly because of concern that the government would continue to interfere heavily in business.
Part of those positive signs, according to Shayo, includes a surprising increase in diesel prices that should help ease the finances of oil giant Petr?leo Brasileiro SA. Other indications are improved concession terms for transportation contracts, a plan to overhaul ports, a renewed focus on fighting inflation and less policy pressure on private-sector banks to reduce borrowing costs.
JPMorgan's upgrade of Brazil was also heavily influenced by a recent rally in China, the note added. According to Shayo, both emerging market powerhouses "have significant structural and policy challenges," but improvement in the way economic policy is conducted "in a structurally challenged economy can drive powerful rallies in underperforming markets."
Shayo and her team are recommending that investors in Brazil add banking stocks - which were for the past year the target of policy pressure by the government of President Dilma Rousseff. That pressure included lambasting private-sector lenders for charging unjustifiable high interest rates to customers and not giving enough access to credit.
Likewise, the strategists are also closing their "underweight" stance on energy and raw materials stocks. This could be done simultaneously by reducing exposure to shares of retail and capital goods, the note said.
<Center><b><i>Copyright Reuters, 2013</b></i><br></center>
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