Will the Portugal ETF Ever be a “Buy”?

Portugal flagLast year in the summer before the October elections, I had the pleasure to meet and have breakfast with the Deputy Prime Minister of Portugal.

I was very impressed with his speech detailing the hard road taken by the government and the population as a whole, after the financial meltdown. It appeared to me that they had decided to be one of the few adults in the EU and commit to the bitter medicine and subsequently were on the road to recovery.

I asked a member of the delegation if the current government would be reelected, and she had hope but sounded a little fearful. I did a lot of research and decided that unlike the country next door Spain, where Podemos who are aligned with Syriza of Greece, Portugal didn’t appear to have any radical left parties. I felt confident that the current center right party would prevail, but I was mistaken.

I guess austerity fatigue had set in and the electorate decided to hand the reins over to the socialists, who formed a minority government. So what has happened since they took power? Well, instead of tackling the economy head on and making sure that there were no hiccups on the road to economic recovery, they had other ideas like raising the minimum wage, increasing the number of public holidays and of course, reversing some of the austerity programs.

All winners in my book! But what this has done is to exacerbate the problem and make the country less investor friendly. Already their exports are down due to the collapse in oil prices that has adversely affected one of its major trading partners, Angola. So, the confluence of events has led to the last holdout who gives the country an investment grade ranking DBRS, to reconsider that. All other major rating agencies have already lowered the country’s debt to junk levels. And all of this could have been avoided.

Yes, austerity stinks, but the alternative which is for the foreign investment to evaporate is even worse. Currently Portuguese 10 year bonds (GSPT10YR:IND) are yielding over 3%, but had spiked to over 4% in early February. I believe the writing is on the wall for the country, and the government needs to make the right choices fairly quickly, or lose badly and become another Greece.

PGAL-2016-08-29

The only Portuguese focused ETF is the Global X FTSE Portugal 20 ETF (NYSE:PGAL). PGAL is certainly not a buy at this point, but could be, if the current government either loses a non-confidence vote or grows up. And what are the chances of that?

About the Author: Peter Kohli

peter-kohliPeter Kohli is President of DMS Advisors where he is involved in investment research, and in particular the developing markets. He also writes a blog for the Nasdaq website and for Frontera News. Before that, he was CEO/CIO of DMS Funds. As such, he managed the Firm’s operations, including index selection and fund development, and was actively involved in all of DMS Funds’ business development efforts. Earlier, Peter held a variety of financial services-related positions, including a financial planner. Peter holds a Chartered Financial Consultant (ChFC) designation from The American College (Bryn Mawr, PA) and a BA in Mathematics from The Open University (Milton Keynes, England).