The Global X FTSE Portugal 20 ETF (NYSEArca: PGAL) has been one of the leaders of the PIIGS ETF pack this year with a gain of 15.5%.
However, the bulk of that upside was accrued in the first quarter. Over the past month, PGAL, the lone Portugal ETF, has traded modestly lower. That trend looks poised to reverse as Portugal approaches becoming the second PIIGS nation after Ireland to escape the clutches of an international bailout. [Bailout Exit Lifts Portugal ETF]
There is evidence Portugal’s economic recovery is deepening and budget deficit targets appear attainable.
“Exports continue to drive economic growth, while private investment and consumption have also started to pick up. Unemployment is expected to decline further, in line with the moderate economic recovery expected in 2014 and 2015,” said the International Monetary Fund in a statement.
The IMF also noted increased strength in the Portuguese banking sector, which is important due to PGAL’s 21.2% weight to the financial services sector, according to Global X data.
“Bank capitalization has been significantly strengthened during the program and dedicated resources remain available to support the banking system, in compliance with EU state-aid rules, should additional capital needs arise. Market liquidity conditions have also continued to improve. The trend in non-performing loans has stabilized, although operating conditions for banks remain challenging,” said the IMF.
The strength of European banks will be revealed in the coming weeks as the European Central Bank engages its own version of stress tests. [Europe’s Stress Tests Spotlight This ETF]
Plunging yields on Portugal’s 10-year sovereign bonds have also been a boon for PGAL and the country’s ability to tap international debt markets.
“This reflects domestic economic developments, in the context of a broader market rally across the region. Portugal has used these improved market conditions to conduct a number of successful bond exchanges and issuances, smoothing the profile for future debt payments and building a substantial cash buffer,” according to the IMF.
The yield on Portuguese 10 years closed at 3.63% last Friday, down from a high 16.4% at the end of 2011. [PIIGS ETFs Soar]
Global X FTSE Portugal 20 ETF
ETF Trends editorial team contributed to this article.