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A TOUGH TIME FOR BRAZILIAN EQUITIES

Analysts at BCA Research expect Brazilian stocks to suffer regardless of the direction of Brazilian fiscal and monetary policies, downgrading their stance on Brazilian stocks to 'underweight' within an EM equity portfolio.

In a note dated Friday, BCA Research analysts, led by Chief EM/China Strategist Arthur Budaghyan, said they expect Brazilian equities to sell off if authorities tighten monetary and fiscal policies, as that could lead to the economy contracting.

On the other hand, if policies are relaxed, "worries about public debt sustainability will cause the currency to plunge and push up domestic bond yields."

BCA believes Brazil's public debt remains on an unsustainable path because government borrowing costs are well above the nominal GDP growth rate, citing central bank data.

A central bank survey released back in February also showed a bevy of Brazilian financial institutions seeing greater fiscal risks and a worsening economic cycle over the next three years.

Rising inflation also seems to be a concern, with data released last week showing annual inflation exceeding 5% for the first time in over a year in February. BCA Research notes that inflationary pressures are "stubbornly high" due to a still positive output gap and a very tight labor market.

In response, Brazil's central bank raised interest rates by 100 basis points in its March meeting for the third consecutive time, and signaled a smaller rate hike at its next policy meeting.

The third cause of concern could be slowing growth, which, according to BCA, was highlighted in a weak PMI new orders reading for February.

Lastly, the researchers expect Brazil to be hit hard if U.S. President Donald Trump's reciprocal tariffs come into effect on April 2, owing to its generally protectionist trade policies on products like ethanol.

Brazil charges an 18% tariff on U.S. ethanol, according to the American Biofuels Association.

Still, the local Bovespa .BVSP stock index is currently up more than 9% year-to-date, likely benefiting from a move away from U.S. equities as markets have broadly begun to question the case of U.S. exceptionalism amid the tariff uncertainty.

(Shashwat Chauhan)

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FOR MONDAY'S EARLIER LIVE MARKETS POSTS:

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EUROPEAN STOCKS FLAT, MINERS RISE - CLICK HERE

EUROPE BEFORE THE BELL: STOCKS HEAD FOR UPLIFT DESPITE TARIFF ANXIETY - CLICK HERE

IN GOOD SPIRITS AFTER HINTS OF TARIFF RETREAT - CLICK HERE