BCA cuts Brazil stock rating on Lula win, fiscal concerns

BCA downgraded its stock rating on Brazilian equities following President Luiz Inácio Lula da Silva’s election victory, citing concerns over fiscal policy and structural reform prospects.

The firm reduced its exposure to Brazilian stocks relative to the emerging markets benchmark despite Monday’s selloff.

Lula’s election triggered a sharp decline in Brazilian financial assets. The real fell roughly 9%, and the IBOVESPA declined over 13%, representing a major common currency stock market decline.

BCA expects Brazilian markets to follow a vicious cycle in the coming weeks. Default rates among consumers and businesses are rising despite persistent fiscal stimulus. If fiscal stimulus is curbed to quell market concerns, the economy will be plunged into recession.

The falling currency will drive imported inflation higher, necessitating rate hikes until the economy slows. BCA stated that equities are likely the most vulnerable asset class in Brazil and described Brazilian stocks as a value trap despite the potential for a near-term bounce.

The firm also recommended reducing cyclical exposure to Brazilian debt, including sovereign and domestic bonds. BCA noted there is no guarantee Lula will act to quell markets or that markets will respond in the near term, and no politically feasible path to containing the debt exists even if the right-leaning Congress contains Lula’s fiscal measures.