Portugal ETF: Canary In The Coal Mine For Europe Investing? [Global X FTSE Portugal 20 ETF]

portugal2014 does not appear to be going smoothly for the Euro zone overall. If deflationary worries and a pause in growth in some big nations were not enough to trouble investors, recent worries over the reliability of one of Portugal’s banks prompted a broader market selloff.

While both U.S. and European stock markets were punished following the news on July 10, the penalty was reasonably harsher for the nation in question – Portugal.

What Happened in Portugal? 

As per Reuters, Espirito Santo International, the largest shareholder in Banco Espirito Santo – one of the biggest banks in Portugal – stalled its shares and bonds trading because of material difficulties at its parent company Espirito Santo International (ESI).

Espirito Santo International allegedly defaulted on a debt payment this week and was accused of accounting discrepancies. This piece of information was enough to unnerve investors who have just seen the Euro zone emerging out of a two-and-half year long recession last year.

As a result, Banco Espirito Santo AS saw its shares plunge 17.2% on July 10 while Espirito Santo Financial Group SA and Portugal’s benchmark stock index plummeted 8.92% and 4.2%, respectively.

The Portuguese index experienced the worst slump since last July. Among other pillars of PIGS nations (Portugal, Italy, Greece and Spain), the Italian market fell about 1.87% and the Spanish market was down 1.92%.

European stocks moved to their 2-month lows. The woes also spread globally with the S&P 500 shedding about 0.50%, the Dow Jones falling 0.9% and the Nasdaq moving 1.44% down yesterday despite an impressive U.S. job report. The VStoxx index – a fear gauge index in Europe –  closed Thursday’s key trading session at 10% higher.

Portugal as an Economy 

The Portuguese economy managed to emerge from recession during the second quarter of 2013 and started to show signs of revival. Rising consumer confidence and demand, recovering exports and declining unemployment played their role in bringing the economy back to life.

Not only this, Portugal was the second Euro zone country, after Ireland, to successfully exit its bailout program this May (read: Top European ETF to Play the Portugal Bailout Exit).

ETF Impact 

As a result, investors flocked to the Portuguese stocks helping the core Portugal ETF Global X FTSE Portugal 20 ETF (NYSEARCA:PGAL) to gain over 15% in the first quarter of 2014. However, the markets bucked this trend in the second quarter posting a loss of 7.25% as the economy registered a dip in its Q1 growth rate.

The Portuguese economy shrank 0.6% sequentially in the first quarter of 2014. Quite justifiably, the fresh baking woes hit the ETF hard, causing PGAL to retreat 3.99% on the day.

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