The Only Place Confidence Isn't Booming in Portugal Is Stocks

  • Almost two-thirds of market value wiped out since 2007
  • Shares trade near lowest valuation in a decade versus Europe

The upbeat mood surrounding Portugal’s economic resurgence is nowhere to be seen in its stock market.

Business and consumer confidence in Europe’s third-most indebted nation has soared since 2012, surviving a political crisis, a banking blowup, and concerns that anti-austerity sentiment would spread from Greece and Spain. But for Portuguese stocks, the wounds are proving slow to heal. Since this year’s high, the nation’s benchmark gauge has lagged behind most European measures.

Portuguese stocks have lost almost two-thirds of their value since 2007 as investors and even companies shunned the market, with only half the number of listings it had in 1992. Further complicating the picture: voters are heading to the polls on Sunday, and the current coalition government is expected to lose its majority. That puts the continuity of the economic recovery at risk, according to Diogo Teixeira, chief executive officer of Optimize Investment Partners in Lisbon.

“We need a smooth extension of the policies that got the economy moving,” Teixeira said. His firm manages $134 million. “The PSI 20 is having a hard time recovering from the shocks of the past few years. It could use some good news. People are looking for a sensible economic program from whoever wins.”

Stung by the downfall of Banco Espirito Santo SA -- once the country’s largest lender by market value -- as well as the resulting sale of Portugal Telecom SGPS SA’s assets, the benchmark PSI 20 Index has lost 10 percent in the past year. That’s worse than all European gauges tracked by Bloomberg, except Greece and Spain.

The PSI 20 jumped as much as 32 percent in 2015 through April as bond-buying from the European Central Bank encouraged risk-taking, but the optimism was short-lived. With the interrupted sale of Espirito Santo’s bailed-out bank weighing on lenders just as crises in China and Greece roiled global markets, the PSI 20 fell 19 percent since then through yesterday. It rebounded 2.1 percent at 10:22 a.m. in Lisbon.

While Podemos in Spain and Syriza in Greece have challenged the establishment, Portugal has seen continued support for the two parties that have taken turns in leading the country since 1981. The blocs fighting for power are both committed to the fiscal restraint that has suppressed bond yields and pushed Portugal’s credit rating closer to investment grade.

But Morgan Stanley economists including Daniele Antonucci see risks to the economic outlook, saying the mainstream parties will probably prioritize cutting down on austerity measures rather than introducing more reforms. Portugal’s economy will expand 1.6 percent this year and 1.7 percent in 2016, estimates compiled by Bloomberg show. Those forecasts have risen since the beginning of 2015, bucking the trend for global growth.

“The cyclical outlook looks good to us, but risks of a hung parliament, and less focus on structural change, may cast doubts on whether potential growth can truly rise,” Morgan Stanley economists wrote in a Sept. 28 note. “If the election doesn’t deliver a decisive mandate to continue along a reform path, the economic fabric may fail to heal fully.”

Derailing the recovery would be another blow for an equity gauge trading at 12.8 times projected profit, near the lowest valuation in at least a decade relative to the Euro Stoxx 50 Index.

Morgan Stanley analyst Krupa Patel recommends investors buy Portuguese stocks after the recent selloff, noting the disparity with the improving economy. Traders have pulled money from the nation’s equity funds for 13 straight weeks, according to the note, which cites EPFR Global data.

“The reputation of the stock market in Portugal has just had the most awful time -- very large pillars of the Portuguese stock market have fallen by the wayside,” said Rupert Welchman, who helps manage 1 billion euros ($1.1 billion) including Portuguese shares at Union Bancaire Privee in London. The companies that suffered “make Portugal unique and also undermine the stock market,” he said. 

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