A decision by Standard & Poor's to lower Brazil's sovereign debt ratings to "BBB minus" from "BBB" is likely to reinforce a negative perception on the nation's equities, strategists at JPMorgan Securities said on Tuesday.
According to a client note by strategists led by Pedro Martins, S&P's decision "does not help Brazil's relative valuation to emerging markets" because it heightens risks that earnings could disappoint. Currently, prices for Brazilian equities are trading at 9.2 times estimated earnings, compared with a multiple of 9.7 for emerging markets countries, the strategists said.
The ratings cut "validates the perception that Brazil's cost of equity should be rising, adding to the expected increase in 10-year U.S. Treasuries ... and it should create headwinds for domestic consumption, financially leveraged and infrastructure companies," the note said.
The downgrade is a sign of enhanced scrutiny of Brazil's policies, Martins and his team said. They pointed to a deterioration in interest rates, foreign exchange and credit risk in Brazil as well as the possibility of energy rationing.