That’s the play put forth by Bill Witherell of Cumberland Advisors, who argues that Portugal is definitely no Greece:Portugal’s economy is only two-thirds the size of Greece’s small economy and accounts for just 2% of the Eurozone economy. Portugal suffered a more severe recession than Greece last year – GDP declined by an estimated 2.9%, more than double the 1.1% reduction for Greece. This set back the impressive progress the government had been making in reducing the deficit, which had improved in 2007 and 2008 to less than 3% of GDP, as compared with 6.8% in 2005. The deficit jumped to 9.3% of GDP in 2009 (compared with Greece, 12.7%; Ireland, 12.5%; Spain, 11.4%, and Italy, 5.3%).
Going forward, the economic forecast for Portugal is for a return to positive growth this year, in contrast to the further declines projected for Greece, Spain, and Ireland. Portugal did not suffer from a housing bubble, like Spain and Ireland. Its banking system is sound. Productivity growth is above the EU average, which should improve the economy’s competitiveness and help Portuguese firms take advantage of the weaker euro. The government has been carrying out a number of structural reforms. The government has a responsible program in its 2010 budget for reversing the recent fiscal deterioration. Further restrictive fiscal steps will be necessary in 2011 and 2012. Polls indicate that the government seems to have the needed support of a strong majority of the population to continue with responsible fiscal policies.
Another reason for investors to differentiate between Portugal and Greece is Portugal’s easier funding schedule, with gross financing requirements in 2010 being only a third of those faced by Greece. Between March 10 and May 10 Greece has some 21 billion euros in redemptions and coupon payments coming due. Together with the fact, as noted above, that Portugal’s debt-to-GDP ratio is substantially less than that of Greece, this longer-maturity schedule means that Portugal has more time to resolve its fiscal problems. Also taking into consideration the greater credibility of Portugal’s government, and its statistics, we agree with BCA’s conclusion that “Portugal is nothing like Greece.”
Our conclusions for investment strategy are that Portuguese bonds, with real yields above 4%, look attractive, whereas Portugal’s equities probably will not outperform the Eurozone average this year. Thus far in February, comparing MSCI indexes for national equity markets, Portugal’s equity market is down 7 %, which is better than the 11.8 % decline for Greece and the 8.6 % decline for Spain, but more adverse than the declines in Italy, -5.7 %; Ireland, -5 %; and the entire Eurozone, -5.7 %. Portugal’s equities are likely to encounter headwinds due to the expected tough fiscal policies during the next three years. Equities in the stronger Eurozone markets – Germany, France, Netherlands, and Belgium – are likely to perform better, with their export industries more able to take advantage of the trade opportunities resulting from the weaker euro.