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
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.