Strategic trade
/
Buy
Trade view / 04 July 2017 at 8:15 GMT

Looking at PORT20.I on macro upside — #SaxoStrats

Head of Equity Strategy / Saxo Bank
Denmark
Instrument: PORT20.I
Price target: 7000
Market price: 5173
Background

In our House View publication we have reiterated an overweight/positive view on peripheral European equities with special focus on Italy and Spain. The recent banking rescue in Italy is net positive for sentiment in the region. 

Today we are broadening our call with a buy recommendation on Portuguese equities based on big macro surprise into the equity valuation.

The PSI 20 is the leading index for Portuguese equities. The biggest index weight is Banco Comercial Portugues with 16.5%, it is the only remaining publicly-listed bank of size. On the sector level, the three publicly-listed utilities stand for 26.2% of the index's weight. The rest is mostly scattered over consumer staples and cyclicals such as materials and energy. 

The index trades at 18x forward EPS and the index has a dividend yield of 3.6%. On price-to-book ratio the index valuation is as depressed as during the 2012 euro-area crisis. This means that there is plenty of upside potential should the outlook and underlying fundamentals improve just slightly.
PSI 20 Index valuation






















Source: Bloomberg and Saxo Bank
 
Reading through analyses on the Portuguese banking sector, it's our view that the market is massively missing the snowball effect from improving macro fundamentals.

Portugal's real GDP growth was 2.8% in Q1 which was the highest growth rate since Q4 2007. Only two times in the past 14 years has Portugal experienced this high growth rate. Through a combination of labour market reforms working and booming tourism on the background of terrorism in Tunisia and Turkey.

Unemployment rate was 9.8% in May down from 12.2% in December 2015 and down from whopping 17.5% in January 2013. The unemployment rate is approaching 2006-2007 levels. The most impressive about the rebound is that it comes with the lowest deficit to GDP since 1995. The deficit to GDP was 2% in 2016 improving from 11.2% in 2011. Nominal wage growth is 2% the past year, the highest level in seven years.

Confidence in the services sector is the highest since 2001 and confidence in construction is improving. Confidence in manufacturing is the highest since 2007 and economic climate surveys show the most positive outlook since 2002.

Services sector confidence
Portugal services confidence
Source: Bloomberg 

Not everything is rosy. Government debt to GDP is still at 130% and credit to non-financial sector is down 25% and at lowest levels since Q3 2007. But the negative impact from credit just makes the growth even more impressive. The banking sector is still weak with one of Europe's highest non-performing assets in percentage of credit outstanding. In addition Portugal has 40% more bank branches per capita than what is the average in Europe.

Our bullish call on Portugal is based on our view that the underlying macro indicators will soon accelerate credit formation, lower loan-losses in the banking sector, less non-performing loans, construction spending having positive contribution to GDP again and tourism continuing to flourish. All of these factors cause a valuation shift in the equity market.

Management and risk description

The biggest risk to our trade is a global economic slowdown which would hit Europe's economy and thus Portugal. The banking sector is still a looming threat to sentiment and the equity market. With recent banking rescues in Spain and Italy the focus is now back on Portugal. Hopefully the country can orchestra a convincing recapitalising plan for the banking sector so credit can begin flowing again.

PORT20.I weekly prices (five-year chart)
PORT20.I equities
Source: Saxo Bank

Another risk to our call is the high index weight in utilities which typically are not high growth companies so that could impact the revaluation component of outlook.

Parameters

Entry: We are entering the Portugal equity market through buying the CFD Index tracking PORT20.I at market.

Stop: We are placing our stop 4,330 reflecting our risk tolerance of a 16% loss from current levels against a much steeper upside. The stop loss level represents some of the most stressed levels in the index, so if the stop loss is breached it would constitute either a domestic banking crisis or a European growth halt.

Target: Our price target is aggressive at 7,000 as we expect the index to recover most of the drawdown experienced since the peak on the backdrop of ECB's QE announcement in early 2015.

Time horizon: this is a strategic trade on peripheral European equities and specifically on Portugal as an outperformer. We do not expect a recession over the next 12 months based on the current macro data in Europe. Our time horizon extents into late 2018 on this call so this is major equity call for us.

— Edited by Clemens Bomsdorf

Non-independent investment research disclaimer applies. Read more
A compiled overview of Trade Views provided on TradingFloor.com is found here
2y
Peter Garnry Peter Garnry
It's worth noting that placing a long position in the PORT20.I has a rolling financing costs of around 3.5% + Euribor for most Saxo Bank clients. But the markup can change depending on the pricing profile. Having said that the financing cost is acceptable given the opportunity we are chasing here.
2y
Logich Logich
Is there a Future in PORT20 that might be an alternative to the CFD?
2y
Peter Garnry Peter Garnry
On this particular index we only offer the CFD Index tracker
2y
DaCosta DaCosta
DBD agrees on your "trade idea" since June 2017...good vibes!
2y
HUGO A HUGO A
I think is almost impossible PSI reach the 7000 target.Why?European and US indexes had reached all time highs in recent weeks and PSI is very distant from that .The PSI nowadays is totally diferent of the PSI until 2014,without BPI;BES;PT;CIMPOR;BRISA.What would be the triggers for that substancial growth?Jeronimo Martins is one of the most expensive european retailers ;GALP is not cheap ; EDP and REN both with lots of debt will be afected for the expectations of rising in interest rates.BCP still has a lot of NPL;Corticeira Amorim ALTRI navigator increased a lot in the past years and their earnings benefit with strong dolar -dolar lost value in recent months.Correios has a declining business and is losing money with a new bank.
2y
Peter Garnry Peter Garnry
@HUGO "I skate to where the puck is going to be, not where it has been.” (Wayne Gretzky).
2y
ashrafj1 ashrafj1
Hi Peter so trade idea still valid
2y
DaCosta DaCosta
And there it goes on and on! Up up... :)
1y
HUGO A HUGO A
Hey Peter Garnry ! Nice 7000 points in Psi 20 😀

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