Portugal Votes For Austerity, ETF Reacts Well

The ComStage PSI 20 UCITS ETF was up 0.5 percent today as the Portuguese vote centre-right

RachaelRavesz_100x66.jpg
|
Editor, etf.com Europe
|
Reviewed by: Rachael Revesz
,
Edited by: Rachael Revesz

Portugal has voted for austerity by allowing its centre-right coalition to retain power, which could be a good sign for European equity exchange traded funds, but industry commentators say the struggles of the former "PIIG" member – Portugal, Italy, Ireland, Spain – are not over.

The election over the weekend in Portugal saw Prime Minister Pedro Passos Coelho and his "Portugal Ahead" coalition stay in the top seat, although results indicate it has lost its absolute majority in parliament after four years of harsh austerity and soaring unemployment.

The ComStage PSI 20 UCITS ETF (CD47), which tracks large cap Portuguese equities, was up 0.5 percent this morning in euro terms and has fared well year-to-date at over 13 percent returns. Over three years it has produced flat returns of 1.5 percent.

Meanwhile, the sister party of Greece’s anti-austerity party Syriza, Left Bloc, achieved a record result of 10.2 percent of the vote, ensuring that the centre-right did not keep all of its seats.

Capital Economics’ European economist Jessica Hinds said Sunday’s election does not alter Portugal’s challenging outlook, with a potential minority government struggling to reduce public debt – over 130 percent of GDP – and maintain the economic recovery.

“Demographic shifts will put additional pressure on the country’s fiscal position, while weak growth and low inflation will make it even harder for the government to achieve the necessary fiscal consolidation,” she wrote today.

The Portuguese 10-year government bond yield has also rallied a long way since 2012, from a peak of 15.2 percent in January that year to a five-month low of around 2.2 percent today.

“[…] the risk is that we see a renewed rise in borrowing costs following the sharp falls of recent years,” said Hinds.

Hinds added that other peripheral European countries will be “cheered” by Portugal’s election result, which indicates the populace is resigned to accept austerity after the credit crisis, and bodes well for Spain and Ireland, which have their elections in December and early 2016 respectively.

Allan Lane, managing partner of Twenty20 Investments, wrote in a recent blog that the earlier market “euphoria” of quantitative easing is now over, and many countries like Spain and Germany have produced negative or barely positive returns year-to-date.

“For that reason a regional bet might be one’s best option rather than taking single country risk,” he wrote.

 

Rachael Revesz joined etf.com in August 2013 as staff writer. Previously an investment reporter at Citywire, she has a background in writing content for retail financial advisors and has covered a wide range of subjects in finance. Revesz studied journalism at PMA Media, which has since merged with the Press Association. She also holds a B.A. in modern languages from Durham University, as well as CF1 and CF2 financial planning certificates from the CII.