Posted inSOUTHERN EUROPEEquities

Portugal: from pig to golden child

Aerial view of Oporto skyline and Ribeira Waterfront from Dom Luis I Bridge at twilight. Picturesque urban cityscape of Porto in Portugal. Tourist boats cruising on Douro River at sunset light.

In the aftermath of the global financial crisis, the unflattering acronym ‘PIGS’ entered the popular lexicon to describe southern EU member states – Portugal, Italy, Greece and Spain – that were unable to refinance government debt or bail out stricken banks without the help of third parties.

Almost a decade on, Italy and Greece remain at risk of default, but Portugal has undergone a remarkable turnaround in fortunes.

The country left a stringent EU and IMF-led austerity programme four years ago and its economy has expanded for 15 consecutive quarters. GDP grew 2.7% last year – it’s strongest rate of expansion since the millennium.

Consumption and investment

Domestic demand has driven growth – household spending on big-ticket items such as cars and furniture has risen sharply –  and investment has soared. Investment into export-oriented sectors doubled last year to hit a record high of €1.9bn. The tech sector pulled in €325m of new cash inflows.

The government has made obtaining residency easy which has drawn retirees from all over the world and made Lisbon and Porto attractive destinations for creative and technological entrepreneurs.

Tourism, meanwhile, has boomed, accounting for 9.2% of GDP in 2016. The country’s miles of warm sunny beaches benefiting from the drop-off in bookings to Turkey and North Africa.

As a result, Portugal’s unemployment rate has declined to its lowest level (7.9%) for more than a decade. (As a point of comparison, neighbour Spain’s unemployment rate rose 0.7% in Q1 to 16.7%.)

“Portugal has been the golden child of southern Europe,” said Chris Bailey, European strategist at Raymond James Financial.

Yields on 10-year Portuguese government bonds have fallen almost 50% over the last year to 1.7%. Last year Portugal was re-awarded its investment-grade credit rating.

The benchmark PSI-20 stock index, meanwhile, has risen 18% since the start of 2017.

An illiquid bourse

The Portuguese stock market, however, is narrow and illiquid – led by clutch domestic of corporates along with a raft of smaller players.

Many established Portuguese companies have been bought out by their larger Spanish counterparts over the years – such as Portugal Telecom which is majority owned by Spain’s Telefonica.

“Portugal is still a relative backwater from a corporate perspective,” Bailey said.

Nonetheless, the country’s corporates have generally posted positive Q1 results. Portugal’s largest listed bank Millennium BCP, for example, announced a 71% jump in Q1 profits to €85.6m. Chinese conglomerate Fosun International last year raised its stake in the bank to 25%, boosting the bank’s global prospects.

Food and retail group, Jeronimo Martins, meanwhile, posted a 5.8% rise on in Q1 profits. The group operates more than 3,600 stores in Portugal, Poland, and Colombia.

However, utility group EDP-Energias de Portugal – Portugal’s largest company by assets – posted a 23% drop in Q1 profits, which it blamed on currency pressures and domestic regulations.

Double leveraged market

“Portugal is a double leveraged market,” Bailey continued. “Its prospects are decided by exogenous factors outside its control, when it’s looking good for European equities Portugal does very well – and the complete inverse when it’s the other way around.”

The attitude of international investors towards Europe has improved considerably over the last 18 months has on the back of improved economic data. Growth rates for the eurozone beat expectations in 2017 to reach a 10-year high at 2.4%.

However, eurozone GDP growth slowed to 0.4% in Q1 – the slowest pace of growth for six quarters – as unusually cold weather swept the continent but analysts expect the bloc to bounce back during the rest of the year.

French President Emmanuel Macron’s reform push, and German chancellor Angela Merkel’s desire to leave a positive legacy on the continent, should support further growth in southern EU countries such as Portugal.

The economy’s improvement in the past few years has allowed the country’s minority socialist government to rebalance its finances. Portugal’s budget deficit fell to 2% of GDP in 2016 but rose to 3% in 2017. The country’s overall debt to GDP ratio stands at 130% – behind only Greece and Italy.

“Portugal grapples with the same challenges as the other southern European countries –  income inequality and relatively high unemployment – while trying to maintain sufficient fiscal discipline to encourage Berlin and Brussels that they are still to be a country to be trusted,” Bailey said. “It is a bit of a balancing act.”

Magallanes Value Investors Ucits Iberian Equity fund – which has 25% Portuguese equities – posted returns of 9.72% over the last year to May 11, according to FE Analytics.

David Robinson

David Robinson is the editor of Expert Investor. He has 18 years’ experience as a business journalist and editor. In the past he has written for the Guardian newspaper and The Telegraph, and worked as...

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