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Top European ETF to Play the Portugal Bailout Exit

Zacks Equity Research

The European economy is slowly and steadily showing signs of an improved economic outlook. Business activity across the Euro zone is running at a three-year high – a clear indication that the economy’s growth is on track.

This is especially true as Markit’s composite flash Purchasing Managers Index (PMI.V) – which tracks both the manufacturing and service sectors of the region’s economy – came in better than expected for April. Moreover, the Euro-area consumer confidence is seeing a rising trend and the reading for April increased to the highest level in six and a half years on the back of a falling unemployment rate.

Also, many nations in the Euro zone – France, Germany, the Netherlands, Italy and Denmark – emerged out of recession last year.

In line with this trend, another European nation, Portugal, also managed to emerge from recession during the second quarter of 2013 and is now showing signs of revival. Effective implementation of structural reforms, rising consumer confidence and demand, booming exports and declining unemployment are all playing a key role in bringing the economy back to health.

Portugal in Focus

Moreover, Portugal is expected to become the second Euro zone country, after Ireland, to successfully exit its $108 billion (€78 billion) three-year bailout program in May this year.

This speculation has been doing the rounds after the country successfully managed to raise €750 million at its first regular debt auction since its bailout by the International Monetary Fund and EU in 2011 (read: Euro Zone Recovery Puts Ireland ETF in Focus).

The best part was that the auction settled for a better-than-expected yield of 3.57%, according to a report by Financial Times. Moreover, following the successful issue, Portuguese 10-year bond yields have hit a fresh eight-year low, indicating rising investor confidence. Also, the offer enjoyed a bid-to-cover ratio of 3.47 times and marked the first auction of longer-term bonds managed by the country since its bailout three years back.

Will Portugal Opt for Clean Bailout?

With the successful sale of bonds, chances are high that the government will opt for a bailout program without a precautionary credit line from the European Stability Mechanism and would instead go for a clean exit.

This is indeed encouraging considering that only six months back many investors as well as EU officials were convinced that Portugal would require a second full bailout after the current program comes to an end this year.

The government is also believed to be facing pressure from the opposition Socialists who are clamoring for a clean exit.

Portugal to its credit has built up a sizable cash reserve of more than €15 billion, which is expected to keep the country fully funded for about a year after the bailout ends. This should come as a relief to investors, giving them some assurance that the country would be protected from any financial market turbulence at least for this year.

Given the recent developments, investors can keep a close eye on the Portugal ETF Global X FTSE Portugal 20 ETF (PGAL) to ride gains, if any, from this positive turn of events (see all European Equity ETF here).

PGAL in Focus

The recently launched Portugal ETF has been the second best performing fund in the European equity space in the year-to-date time frame, returning 15.6%. The fund tracks the FTSE Portugal 20 Index and holds a small basket of 20 stocks.

The product is heavily concentrated in its top 5 holdings, which form more than half of the total fund assets. The fund’s top holding Energias De Portugal alone has 20% allocation in the fund.

Sector-wise, the fund is heavily weighted towards the utilities (26.4%) and financials (21.2%) sectors. The fund charges 55 basis points as fees per year (read: Play the PIIGS Recovery with These European ETFs).

Bottom Line

Regardless of whether the Portuguese government chooses to end its bailout program with or without a precautionary credit line, it still needs to keep up its reforms to further improve its economic condition.

Though the unemployment rate is showing a declining trend, it is still in double digits. The European Commission has emphasized that Portugal’s high debt-to-GDP level can only be managed if the country continues to maintain its reform momentum and fiscal adjustments (read: 2014: The Year of the Portugal ETF?).

Portugal has nonetheless achieved a tremendous amount under the bailout program, but it still needs to address its large debt burden and a high unemployment rate before the country can return to prominence. But if you believe this can be the case, investors can consider PGAL for some quality exposure to this in-focus economy.

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Read the analyst report on PGAL


Zacks Investment Research



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