Portugal: Rapid growth set to slow
Having witnessed amazing growth" since the start of this year, Pedro Barroso, head of research at AF Investments, believes that the stock market will rise more slowly over the next 12 months.
The company, which manages Esc500bn ($2.8bn) of pensions money, predicts stock market growth of 10-15% on a conservative estimate for the next 12 months. This growth, he suggests, will come from the inclusion of the Portuguese market in the MSCI, attracting the interest of portfolio managers worldwide. "This year the increase has been amazing. A lot of foreign institutional investors are entering the market and the demand is enormous compared to last year."
On the bond market, the picture is the same as for Italy and Spain, with a marked convergence on the Bund.
Setting out AP Investments' general view, Barroso adds: "In the medium to long term there is not a lot of room to decrease interest rates. It could come down maybe 10 or 20 basis points. There is a more room to decrease short-term interest rates by 50-100 basis points."
Declining interest rates and the MSCI have been the main market drivers, although Barroso notes that there has been some volatility, arising from the comments of ministers in countries such as Germany, France and Spain and Portugal itself. He adds: "We are very, very close to convergence. Much more than last December when there was a lot of doubt about the fundamentals. Now everyone is optimistic about Portugal."
There is also a gradual trend for pension fund money to be increasingly invested in equities. Funds which now have 10% in equities are increasing equity holdings by 1-3% every year, he adds.
The other market driver, the MSCI listing, does have a downside in the share price of EdP. Barroso adds: "From a technical point of view this increase is not very good, because small investors, who usually invest on a family basis, are buying EdP shares at a very expensive price when they should really stop and think about investing."
The other risk to equity is the possibility of interest rate rises resulting from increasing GDP growth across Europe in the next year. He says: "Maybe the interest rate will climb a half point or 1% but on the political front we don't see any problems."
Decisions about stock selection in the next year will be heavily influenced by the current privatisation programme. Barroso recommends financial stocks but also construction and utilities, with the EdP sell-off and the forthcoming privatisations and IPOs in water, telecommunications and companies involved in the road building programme making these sectors attractive to investors. John Lappin"