(Reuters) - JPMorgan upgraded Mexican equities to "overweight" from "neutral" on the back of strong U.S. growth, but cut Brazilian equities citing slower growth in China amid emerging pressures from President-elect Donald Trump's tariff policy.
"Good US growth continues to support Mexican consumers through remittances, at the same time that a weaker MXN increases the purchasing power of these dollars," said JPMorgan strategist Emy Shayo Cherman.
"There is a pretty high correlation between Mexican and US industrial production," added Cherman in a note dated Tuesday.
J.P.Morgan downgraded Brazilian equities to "neutral" from "overweight."
Weaker growth in China, the world's second largest economy could hurt Brazil through lower commodity prices, given the Latin American country is a major soy exporter.
Trump, who takes office on Jan. 20, said he would impose a 25% tariff on imports from Canada and Mexico until they clamped down on drugs and migrants crossing the border. He also outlined "an additional 10% tariff, above any additional tariffs" on imports from China.
Monetary policy outlook by the central banks of both countries could also impact equity markets, JPMorgan said. Brazil is expected to extend rate hikes into 2025, which could hurt corporate earnings growth, while Mexico's central bank is projected to continue easing going into next year.
Latin American equity markets have underperformed this year. In dollar terms, Brazil's MSCI index has stumbled 23% since the start of the year, while peer Mexico has wiped out more than 28% That compares to a more than 6% gain in the wider MSCI emerging market equity index.
"We give Mexico the benefit of the doubt, but will be closely monitoring developments, especially on the institutional reform side, which remains the key risk," J.P.Morgan added.