Many bargain hunters keep grumbling that nearly everything looks overpriced, even with stocks worldwide selling off in recent weeks.
But is one corner of Europe—Portugal—offering a good deal? Yes, say the bulls, as they emphasize that it’s benefiting from a greatly improved economic backdrop. “The Portuguese stock market is cheap, relative to the global stock market,” says Peter Garnry, head of equity strategy at Denmark’s Saxo Bank, which has made Portugal one of its 2018 equity picks.
One exchange-traded index fund that broadly bets on the southern European nation—U.S.-listed Global X MSCI Portugal ETF PGAL, +1.07% —has a price/earnings ratio of 15, versus the Vanguard FTSE Europe’s VGK, +0.56% 17, the SPDR S&P 500’s SPY, +1.74% 22, and the Vanguard Total World Stock’s VT, +1.26% 19.
Portugal’s market is a sizable part of one equity ETF that aims to scoop up our planet’s biggest bargains—Cambria Global Value GVAL, +1.05% . “Across our four long-term valuation metrics, it’s one of the cheapest in the world,” writes Meb Faber, Cambria’s CEO, in an email. The ETF is weighted 9% toward Portugal, and Faber says the country’s stocks will remain in the fund, following an annual rebalancing this month based on Cambria’s quantitative screens.
What about the potential for a hit due to another Piigs country? Italy, part of a group that often spooks markets— Portugal, Italy, Ireland, Greece and Spain—worried investors again with its March 4 general election, which produced no clear winner, but tilted away from mainstream politicians. Writes Garnry in an email: “If the new government in Italy impacts sentiment negatively, then we will re-evaluate.”
Analysts have warned that a euroskeptic Italian government could derail the euro zone’s economic recovery. A battle to form a coalition government is under way, with the antiestablishment 5 Star Movement jostling with a center-right alliance that involves the populist League party and former Prime Minister Silvio Berlusconi’s Forza Italia. Each faction is considering deals with members of the center-left Democratic Party.
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For now, bulls can still point to a range of encouraging indicators, from sentiment readings to the latest figures on gross domestic product. “Investor and consumer confidence remains high in the euro area and Portugal,” Garnry says. “We remain positive on Portuguese equities in 2018,” he adds, barring a “dramatic downturn in macro fundamentals.”
Some assessments of Portugal’s health make it sound like it’s time for a toast with a glass of port. “Overall, the economy experienced a noteworthy turnaround in 2017, with full-year GDP growth soaring to a 17-year high of 2.7%,” writes Nihad Ahmed, an economist at FocusEconomics, in a recent note. She has concerns about the small country’s big debts, as well as muted wage gains and an expected slowdown in exports. But she adds that FocusEconomics panelists forecast a 2.2% rise in GDP this year and 1.9% growth in 2019. “The job-rich recovery should continue at a healthy pace, thanks to a flourishing tourism sector, strong real estate investment, and solid exports,” Ahmed says.
In a note, ING economist Steven Trypsteen predicts that Portugal’s fiscal policy ought to “remain mildly expansionary, although room for much laxer policy is limited as the Portuguese finance minister, Mário Centeno, is now heading the Eurogroup.” In other words, Centeno can’t become too lavish at home while leading a European Union group that has some relatively thrifty members.
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Portugal’s PSI 20 equity benchmark PSITR, +0.51% is up about 18% over the past 12 months, versus the pan-European Stoxx Europe 600’s SXXP, +0.38% less than 2%. Yet at around 5400, it remains far from its 2015 peak near 7800 and its 2007 high around 13,700.
The country’s stock market is heavy on energy and utility companies. The Global X MSCI Portugal ETF’s two biggest holdings—each more than 20% of the fund—are Galp Energia GALP, -0.33% and Energias de EDP, +1.95% . That leads analysts at ETF.com to warn that the fund, which has just $51 million in assets under management, is “highly concentrated,” though “still a good proxy for the broad Portuguese market.”
This report first appeared at Barrons.com on March 10, 2018.