Brazil stocks raised to Buy at Morgan Stanley on policy change expectations

Investing.com -- Analysts at Morgan Stanley (NYSE: MS ) have upgraded their recommendation for Brazilian stocks from Equalweight to Overweight. In a note to clients on Tuesday, the American bank presents an optimistic view for Latin American countries’ stocks, setting a target for the MSCI Latam index at 2,800 points by the end of 2026, representing a return of approximately 23% in dollar terms.

The upgrade of the Brazilian stocks recommendation to "Buy" is due to:

  1. Expectations of political change amid the declining popularity of President Lula.
  2. Peak with potential reduction of interest rates in the country.
  3. Dollar likely to weaken amid falling global interest rates.
  4. Cheap valuations.

Morgan Stanley states that it has increased its exposure to financial, oil, state-owned, utilities, and concession companies, naming stocks like Petrobras (BVMF: PETR4 ), Prio (BVMF: PRIO3 ), Motiva (ex-CCR) (BVMF: MOTV3 ), Nubank (BVMF: ROXO34 ), and Eletrobras (BVMF: ELET3 ). The bank notes that Brazilian stocks are trading at a price-to-earnings ratio of approximately 9x, delivering around $90 billion in annual profits, which is a recession-level pricing in earnings and inconsistent with other markets.

“We believe a busy electoral calendar over the next 18 months opens up the opportunity to start a much needed policy shift, especially on fiscal policy,” write the American bank analysts, noting that fiscal risk remains high.

“We like the risk reward in Brazil, where the Bear Case is unchanged, but simply is less likely and the Bull Case is now more likely, in our view,” Morgan Stanley assesses, mentioning that Brazilian stocks are cheap amidst a "a deep capital market with an extreme positioning toward fixed income to fund a ~10% budget deficit."

“We don’t expect a policy shift before 2027, but simply the possibly of one, could shift the risk reward a bit towards equity,” the analysts say regarding the expectation of a shift in the economic growth model focusing on investments, as opposed to the current focus on fiscal policy to induce consumption.