JPMorgan and Deutsche Bank Upgrade Brazilian Stocks: How to Trade the Opportunity

Bolsonaro, the son of former President Jair Bolsonaro, is widely viewed as the more market-friendly option, having pledged to lower taxes and curb government spending. Investors warmly embraced these first-round results, propelling the Bovespa index—Brazil’s primary stock market benchmark—up by 7.7% on Monday. This marked the index’s largest single-day gain since March 24, 2020, when it had surged 9.7%. Similarly, the iShares MSCI Brazil ETF (EWZ) climbed 12.5% on the day, representing its strongest daily performance since a 13% jump on March 17, 2020.

JPMorgan and Deutsche Bank believe there is further upside potential. “With the results from the first round of the Brazilian elections, it is hard to ignore the impact on markets,” JPMorgan strategist Emy Shayo Cherman noted. “This upside potential is better than what any other LatAm market can offer.” Cherman highlighted a stronger Brazilian real as a key driver, which “could pave the way for more and faster rate cuts.” She also emphasized that the market’s “re-rating on the possibility of a more fiscally friendly macro policy is material.”

Meanwhile, Deutsche Bank’s Nikolaj Lippmann observed that Brazilian equities were significantly under-owned prior to the election, positioning them for further gains. “Brazilian investors have been crowded out of equities by record-high rates, with allocations to local equities now at approximately 5%—just above the all-time low of 4.6%, compared to an 8.5% historical average and a 15% peak,” Lippmann stated in a research note. “Elections open optionality for a new path: fiscal consolidation and a domestic slowdown that ultimately crowd in investment. While the transition will likely take years, the potential is substantial.”

For U.S. investors seeking exposure to the Brazilian market, several avenues are available. One of the most straightforward is through exchange-traded funds (ETFs) such as the EWZ, which is up 35% year-to-date following Monday’s rally. Additionally, several prominent Brazilian companies trade directly on U.S. exchanges, including Itaú Unibanco, Ambev, Banco Bradesco, Petrobras, Nu Holdings, and Embraer.

JPMorgan analyst Yuri Fernandes upgraded Banco Bradesco to overweight. “While we remain cautious on the near-term operating backdrop, we believe Bradesco offers a more compelling rebound setup from here, with valuation and sentiment already discounting a significant portion of the near-term challenges,” Fernandes wrote to clients.

Source link