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Must-know: Investing in Portugal

Surbhi Jain

Overview: A guide to investing in the PIIGS nations (Part 6 of 15)

(Continued from Part 5)

Investing in Portugal

The Banco Espirito Santo (or BKESY), or BES, bailout issue seemed to be a reality check for the European economy and for all developed nations. Only a few years ago, the world saw Lehman Brothers crashing and a severe Eurozone debt crisis. It’s still bearing the brunt of it.

In such a situation, European nation investors should watch the Global X FTSE Portugal 20 ETF (PGAL) and the Vanguard FTSE Europe ETF (VGK). These exchange-traded funds (or ETFs) invest in Portugal and the developed markets in Europe, respectively.

However, for investors seeking bargain shopping in Europe, ETFs that invest in Europe include the iShares MSCI EMU ETF (EZU), the SPDR Euro STOXX 50 ETF (FEZ), and the iShares MSCI EAFE ETF (EFA).

Market reaction

The Global X FTSE Portugal 20 ETF (PGAL) retreated 3.99% on the news of the bailout. The fund tracks the FTSE Portugal 20 Index and holds a small basket of 20 stocks. So far, PGAL has gathered $35.2 million in assets. The product is heavily concentrated in its top ten holdings that form about three-fourth of the total fund assets. The fund’s top holding, Energias de Portugal SA (or EDPFY), has ~21.22% allocation. The in-focus bank—Banco Espirito Santo (or BKESY)—holds ~4.78% of the portfolio. Sector-wise, the fund is heavily weighted toward the utilities and financial sectors at 28.59% and 18.12%, respectively. The fund has an expense ratio of 0.61%.

Banco Espirito Santo shares dropped ~67% last month. The core Global X FTSE Portugal 20 ETF (PGAL) has shed 17.63% in the last 15 days as of August 12, 2014. The negativity spread to the entire continent with the largest European ETF, FTSE Europe ETF (VGK), losing ~4.13% during the same period.

Impact on sovereign yields

A bank’s bailout sends a negative vibe among the investing community. Investors had started to develop faith in the recovery of Portugal—sending yields low. Suddenly, they became wary about the credit risk of their holdings when the Bank of Portugal rescued Banco Espirito SA through a bailout. Portugal’s ten-year government bond yield recently increased from a 3.573% recorded on July 28, 2014, to 3.874% on August 10, 2014, as investors’ perception towards the riskiness of the debt increased.

As a result, the Portuguese bank bailout has spurred tensions over the financial health of Europe, especially the (or Portugal, Ireland, Italy, Greece, and Spain) PIIGS nations. Italy, another PIIGS nation, recently fell into recession for the third time in six years. Continue reading the next part of this series to learn more.

Continue to Part 7

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