Our Opinion: 2013

Knightsbridge Wealth visits Portugal

This week, Knightsbridge Wealth has been visiting Portugal, for the second time in recent months, demonstrating how important the financial and economic health of the country is to those, like us, advising on investment matters.

Since my last visit, three months ago, there are signs of improvement. The main stock market index is almost 10% higher (although those who invested five years ago are still sitting on losses of almost 20%), house prices are slightly up over the last month, for the first time in a long while, and unemployment fell slightly to 15.6% in the third quarter of 2013, from 16.4% in the second quarter.

In the background is the 2011 bailout Portugal received of €78bn to prevent it going bust. The coalition is doing all it can to avoid asking for a second bailout.

On Tuesday, the Government passed its latest austerity budget, with strong opposition by those directly affected. Public employees will have their pay cut by between 2.5% and 12%, working hours raised from 35 to 40 hours a week, holidays cut by three days a year and pensions over a certain amount reduced by 10%. 80% of the Government workforce is affected. The Finance Minister said in the budget debate “We are still in a situation of crisis and emergency which demands exceptional measures.”

It is always interesting being on the ground in a country going through so much change, and witnessing the strikes and protests converging on Parliament. It is quite evident that austerity measures are not theoretical – they are something you can touch and feel as you walk around Lisbon. One of our clients used to keep 24 staff busy but is now finding it hard to keep six employed.

The Government were buoyed by the return to growth in the third quarter – albeit of just 0.2%. The question will be whether growth can be maintained with the continued fall in living standards and disposable income. The cuts are designed to make Portugal more competitive outside, but risk causing a downward spiral. People have less money, and stores and businesses are closing.

The UK has managed its cuts, as well as a return to growth, with the help of a floating exchange rate – a luxury Portugal doesn’t have. The crux remains – can the Southern European states really adapt to the model that the ‘troika’ (made up of the EU, IMF and ECB) expects? Growth in Portugal has averaged just 0.4% per annum over the last 25 years so, on that basis alone, it is unrealistic for the population to believe living standards will return to previous levels any time soon.

Our clients in Portugal are, understandably, nervous and feel safer if their investment strategy is, at least for the time being, managed in a more mature market.

At the same time, it is evident that there are opportunities here for all to benefit, when the better times come.