Risk Outlook Junho2015

RESEARCH DEPARTMENT
RISK OUTLOOK
June 2015
Index
1.
EXECUTIVE SUMMARY
2.
MACROECONOMIC REPORT
3.
SECURITIES MARKETS INDICATORS
29
Equities & Equity Futures selected indicators
29
Bonds & Credit Derivatives
35
Investment Management
41
Trading
45
4.
LOOKING AHEAD AND CONCLUDING REMARKS
48
5.
LIST OF GRAPHS
53
comprehensive policy approach to the economy,

given the existing evidence that markets are
1. Executive Summary
repeating behaviours that led to the last financial

crisis.
By early May 2015, the economic recovery of the

Eurozone remains fragile, but the prospect of the
economy picking up has some traction in the
data. Nevertheless, important caveats must be
recognised. Not long ago, in late 2014, along with the
problems
related
to
Greeces
public
debt
In early 2015, the ECBs assessment of the

Eurozone (EZ) remains cautious. The risk of low
inflation in the medium-term led the ECB Governing
Council
to
announce
additional
non-standard
monetary measures in January 2015 (to be deployed

in March), despite the lack of unanimity, with some
management, a flight-to-safety was noticed, with
members advocating a wait and see option. The
more investors turning to treasuries and sovereign
ECB finally promised to arrange a 60 billion per
bonds.
The latest World Economic Outlook (April 2015)
reveals a slightly more optimistic but still prudent
IMF: ()The distribution of risks to near-term
global growth has become more balanced in
relation to October 2014 but is still tilted to the
downside. (). The European and Japanese
economies risk experiencing a period of economic
stagnation. Economic developments in emerging
economies are not promising and are driven by low
growth prospects and a decline in commodity prices.
month quantitative easing plan for the next

couple of years.
Oil prices continued a downward trend in 2015Q1,
with Brents price dropping by more than 50% in one
year, only to slightly rebound, hovering about a loss
of 40% by early May. The euro depreciated against
the dollar by about 20% in one year (early May data).
The external trade balance in the EZ maintained a
clear and stable surplus and the GDP managed to
return to positive values in 2014 (+0.9%). Moreover,
the stock market bloomed in the first four months
The latest figures from the US GDP, along with the
of 2015, with at least a seven-year record high,
very latest PMI indexes from Markit (April 2015) for
when considering the 300 largest European
Europe, reveal an unexpected underperformance,
companies. Sovereign debt yields fell to nominal
hinting that the probable higher GDP growth rate in
all-time lows in a number of European countries.
2015Q1 may not be followed by a similarly strong

2015Q2. These figures give some substance to
the questions on the limits of the current growth
cycle in developed economies. A question that
resonates with the most recent advice from several
international financial institutions on the need for a
3 | Research Department | RISK OUTLOOK | June 2015
The still recent market turmoil shows the frailty level

in several markets and economies, most affected by
the crisis that started seven years ago. Confidence
in a better outlook for these economies, such as
the Portuguese, is not being fully supported by
economic fundamentals. The low oil price and
geopolitical instability have taken a toll in some of the
among NFC and following an apparently stable rule
most recent and important buyers, leading to a steep
of thumb: the larger the loan, the higher the number
fall in Portuguese exports to several countries. A
of non-performing contracts. Taking a closer look at
trend that the Portuguese economy, at least for the
private corporations by size of workforce and non-
time being, has not managed to counterbalance by
financial
gaining enough market share elsewhere. One of the
medium-sized enterprises (SME) are now clearly
key questions for 2015 is whether exports will
below the respective indebtedness level of late
regain momentum, as the European Commission
2007. According to recent analyses by Banco de
predicts in its spring 2015 economic forecasts.
Portugal, most of the deleveraging among private
For Portuguese CEOs, the lack of demand

continues to be the single most important
difficulty for the development of economic activity
and the threat of diminishing profitability also seems
to be dampening investment prospects. On a brighter
note, there are now positive prospects for the labour
holdings,
only
micro-,
small-
and
corporations occurred in the context of debt

write-offs
resulting
from
bankruptcies
(particularly in the real estate and construction

sectors) and only a minor fraction comes from actual
deleveraging of enduring companies. A situation that
Banco de Portugal expects will endure in the coming
years. New bank loans have been slowly decreasing,
market for 2015.
although with high volatility. Thus, the higher

Another key issue is determining the extent to
which the decrease in investments that marked
the Portuguese economy since the 2008 crisis is
to blame for a seemingly sluggish recovery, when
compared with some of Portugals most important
economic
partners.
Data
from
the
European
Commission also reveals that, in 2014, the stock of

capital per employee in Portugal is just about half the
EZ average, comparing badly to the so-called
peripheral countries (Greece, Spain, Ireland and
Italy). For the time being, the Portuguese economy
seems to be dragging along, unable to fully take
indebtedness, mainly among large corporations and

non-financial holdings, even with GDP growing
again, could only be explained by a higher issuance
of debt securities and trade credits. This is not
necessarily happening with SMEs. The conclusion of
a still fragmented access to capital markets is
strengthened by the sustained - if not increasing small versus large loan interest rate spread and the
absence of SMEs from stock markets. Moreover,
even though nominal interest rates have been
clearly decreasing, the real cost of money has
been increasing.
advantage of the low oil price/low euro combination.

For Portuguese households, the credit crunch has
The latest data on non-performing loans in
Portugal, both for non-financial corporations
been ongoing for more than four years now and

there has been a slow but stable deleveraging.
(NFC) and for households, kept beating previous

historical highs, albeit with lower increments
The real estate market is one of the focal points for
risk transmission across multiple sectors. The high
monetary policy instruments intended to fight
real estate market illiquidity, combined with non-
deflation risks could turn out to be themselves a
performing loans has put banks under stress and
risk factor. Achieving real economy yields, which
brought about potential conflicts of interest in
divert investments from search-for-yield and bubble-
highly verticalised financial groups with stakes in
prone markets seems to be critical at this point.
insurance, mutual funds and asset management,

and even regulatory arbitrage. Nonetheless, the
recent
increase
in
prices
has
been
barely
accompanied by banking appraisal values, which

signals that banks are still very prudent and
probably not as important as market players as
they were in the past.
Another looming risk that should be stressed

comes from market-based financing. It has been
signalled as a significant risk, namely in China and in
the USA, and it is being tracked with increasing
interest in Europe. The European Commission has
put forward a plan to build a Capital Markets Union,
responding to calls for the strengthening of the
The frequently quoted sentence that the EZ is
internal market of financial services, the diversifying
recording historically low interest rates and, more
of funding sources and the mitigation of the effects of
generally, a historically low price of money must be
the banking crisis on taxpayers. However, in its
taken with caution. Even though the 10-year
current version, it is strikingly omissive (for instance,
sovereign yields in Portugal have been at the lowest
it fails to address fiscal terms), which advises
nominal value in history, the 12-month Euribor
moderate enthusiasm regarding its effectiveness.
spread (a usual reference for return on savings

deposits) makes sovereign yields ceteris
paribus much more attractive now than before
2009. When sticking to comparing the same class of
investments, the yield of Portuguese 10-year
sovereign bonds maintains a spread vis-a-vis
Germany that is still clearly above its level prior
to the financial crises or even after. Furthermore,
upon entering a protracted low inflation period
combined with low growth, austerity weariness in
several EZ countries and important political
dissent within the EZ could erode the sovereigns
ability to maintain the fiscal revenue at the levels
Against the backdrop of increasing liquidity

provisions, almost all the major stock exchanges
(including the Portuguese) have begun to gain
value. Volatility has clearly decreased in the first
months of 2015 in most financial markets. The use of
internet searches as proxies for the spontaneous
behaviour of agents reveals an increasing interest for
negative terms in the second half of 2014, probably
due to the recent news about Portuguese banks.
Over 2015Q1, the search for positive terms was
stronger. Meanwhile, the Economic Sentiment
Indicator for the Portuguese economy recorded
a seven-year maximum in March 2015.
required to service the debt, which may threaten

the EZs integrity. Against this background,
The
Cyclically-Adjusted
Price-Earnings
Ratio
(CAPE) for the Portuguese Stock Exchange was
below 14 at the end of 2014, which contrasts with the
consequences, in terms of contagion, of a rupture
value observed in 2014Q1 (18.7). Additionally,
between Greece and its EZ partners, the potential
Portugals Composite Indicator of Systemic Stress
repercussions of such a rupture on countries like
(CISS) has trended upwards in the eight-month
Portugal are an important risk factor.
period ending in February 2015, reaching lower

figures in March. The increasing level of systemic
stress during this period stems mainly from the
financial intermediaries segment and from the
equity
market,
and
may
be
justified
by
extraordinary events that affected two prominent

firms of the PSI20 index.
With regard to funds and investment management,

2014 was marked by the winding up of Banco
Esprito
Santo
(BES),
and
the
inevitable
consequences that affected the several branches of

the
financial
group.
Regarding
the
asset
management companies connected to BES, the loss

of investors was unavoidable but no relevant
With regard to bond and credit derivatives, QE
evidence of a flight-to-safety abroad has been
programmes exert a downward pressure on bond
recorded in the aftermath of the winding up. The
yields. Threats of deflation triggered the ECB to
most probable scenario was that assets ended up
massively purchase sovereign bonds in secondary
being channelled to competitor banks investment
markets, and sovereign yields witnessed a sharp
instruments.
fall (particularly after March 2015). Bond yields are

reaching historical nominal minimum levels in almost
all Member States, with the Portuguese 10-year
sovereign yield being similar to the 10-year
sovereign yields of the US or the UK. This may
eventually distort investors incentives to hold
Portuguese bonds and may undermine the ability
Evidence of significant co-movement among

mutual fund investors was found in Portugal, as
well
as
of
flight-to-quality.
Recent
market
developments suggest that investor confidence in

mutual funds is back on the path to recovery and that
mutual fund investors are more willing to invest in
riskier fund categories.
to raise additional capital.

The most recent figures on the relative weight of
By now, the most relevant feature in sovereign bond
markets should probably not be nominal yields. By
21 April 2015, the difference between the
Portuguese and the German 10-year sovereign
market platforms reveal a comeback of lit markets.

Venue fragmentation and trading dispersion still
persist, however, posing a challenge to market
oversight.
yields was nearly 200 basis points, eight times

higher than in 2008. These spreads are passed
on to the real economy and widen the gap
between Member States. Moreover, even though
ECB and IMF officials have been downplaying the
Looking ahead, the extent of the effectiveness of

ECBs
attempts
to
revive
its
transmission
mechanisms to financially support the real economy

and bring inflation closer to the monetary policy
target will determine the outlook for numerous

economies in the upcoming months. The dual goal
of strengthening bank capital and deleveraging
the most indebted banks, along with the need to
fuel credit to the real economy, has proven hard
to attain.
One additional note of concern relates to the
profitability of the banking sector, which remains
an important threat to financial and economic
stability in Europe. The upcoming months should
also bring developments in the discussion of
institutional reform in the EZ and in the EU as a
whole.
Lastly, the increasing importance of capital markets
reinforces interdependence between international
financial institutions. The competent supervision
authorities from different jurisdictions are urged to
work
in
close
cooperation
and
establish
comprehensive framework to avoid regulatory

arbitrage, and to detect and curb systemic risks
in useful time.
questions.
The
IMF
revised
downward
its
macroeconomic prospects for global growth for 2014
2. Macroeconomic Report
and 2015, with a particularly gloomier outlook for the

EZ. By the end of 2014, the real economic data for
Financial markets may be mispricing risk. There is
evidence that markets are repeating behaviours that
led to the financial crisis in 2007.
Germany and most EZ economies proved to be

below expectations, contrasting with better economic
indicators for the US and the UK. Altogether, the
OECD, Interim Economic Assessment, 18 March
probability of a triple dip recession, with the
2015
impending threat of a Japan 1990s-like evolution in

the EZ was gaining momentum.2 Combined with
geopolitical distress in some critical regions of the
The
recent
macroeconomic
background
world (from Ukraine and Africa to Syria and Iraq),
promoted a bolder monetary policy in Europe:
conditions for turmoil were in place in several
In early May 2015,1 several macroeconomic, political
markets.
and social indicators for the Eurozone (EZ) syndicate
Meanwhile, public dissent was noticed, most
both the optimistic and the pessimistic outlook for the
notoriously in France, Italy and Germany, regarding
remainder of the year. As in several occasions during
the flexibilisation of the EZs national budget goals.
the last year and a half, yet again the prospect of
The Eurogroup did not allow Greece to leave the
economy picking up has some traction in the
Economic
data but, like then, important caveats must be
schedule and sovereign yields in countries like
recognised.
Greece, Spain and Italy soared, as they also did in
At the end of 2014, and by the time a bolder
Portugal. In Portugal, five days after the 10-year
intervention from the ECB became more and more
sovereign yields broke below 3% (a historically low
probable, the macroeconomic scenario was one of
figure in nominal terms at the time), yields went up
increasing concern. After a relatively long period of
again by about 25%, reminding markets that the
low volatility in most markets, accompanied by
previous calmness could be disrupted very rapidly. In
moderate economic optimism in some distressed
the beginning of 2014Q4, most of the stock
economies, economic expectations and market
exchange gains of the year had been erased in
behaviour shifted significantly from late September
several markets, a situation that not all markets
Adjustment
Programme
ahead
of
onwards, reviving some (not so) old doubts and
Quantitative data available until 22 April 2015 is used and

depicted. Some inputs are considered until early May 2015.
Referring to the economic stagnation with the low

inflation/deflation period that crippled the Japanese economy,
mainly, in the 1990s.
proved to be able to revert until the end of the year.

Furthermore, unsatisfactory results from the second
Targeted
Longer-Term
Refinancing
Operations
for the next couple of years, aiming at private and

public debt. This QE4 initiative was announced to
start in the beginning of March 2015.
(TLTRO)3 held by the ECB became evident by late
Oil prices continued a downward trend in the first
December. The TLTRO was intended to free
months of 2015, with Brents price dropping more
European banks and NFC from a considerable
than 50% in one year, only to slightly rebound,
fraction of their more illiquid and probably low-quality
hovering about a loss of 40% by early May. The euro
assets,
depreciated against the dollar by about 20% in one
aiming
at
creating
more
favourable
conditions to boost lending to the real economy.

In a nutshell, by the end of 2014, along with the
problems stemming from Greeces sovereign debt
management,
flight-to-safety
movements
were
identified, with more investors turning to the US,

German and also French and AAA sovereign
treasuries and bonds. There were also doubts over
the actual end of the euro crisis that had been
announced by prominent European political leaders.
year (early May data). The external trade balance in

the EZ maintained a clear and stable surplus and the
GDP managed to return to positive growth in 2014
(0.9%). The stock market bloomed in the first four
months of 2015, with at least a seven year record
high, when considering the 300 largest European
companies. Sovereign yields fell to nominal alltime lows in more than 20 European countries.
In March, the ECB revised the economic outlook for
the EZ with optimism, in line with the European
Commission's forecasts. Despite the high level of
The first months of the full deployment of

Quantitative Easing in Europe:
uncertainty, macroeconomic prospects and credit

activity seem to respond positively to the non-
In early 2015, the ECBs assessment of the EZ
standard policies announced in January. With the
remained cautious. The risk of low inflation in the
new asset purchase programme, the ECB is
medium term led the ECB Governing Council to
reducing banks funding costs, aiming at bring down
announce
borrowing costs for businesses and households.
additional
non-standard
monetary
measures in January, despite the lack of unanimity,

with some members advocating a wait and see
option. The ECB finally promised to deploy a 60
By
early
May
2015,
despite
the
risk
of
underestimating the threat of contagion of an EZ

break up caused by the political and financial crisis
billion per month Quantitative Easing (QE) plan
Only by January 2015 and after several months of TLTRO and

direct purchases in the European covered bond and asset backed
securities markets, the ECB balance sheet reverted from the
downward trend it was in (due to a higher pace of loan repayments

from European banks owing to the ECB).
4
Further detail on this programme is presented in the Bonds &
Derivatives section.
between the EZ and Greece, the institutional

consensus on the macroeconomic prospects for the
Graph 1 GDP growth (yoy) and forecasts for

selected countries
Eurozone are positive. According to the IMF 5, the

recent
evolution
of
external
macroeconomic
variables sustain an upward revision of the near-term

prospects.
First notes on Portugal:

Referring to the Portuguese economy, the IMF
sustains a more positive approach, precisely quoting
the euro-dollar depreciation (at its lowest level in 12
years), the record low sovereign yields (historical
Sources: AMECO, European Commission, Winter 2015 forecast.
minimum) and low oil prices (the lowest since 2009).
*Estimate; p-Provisional.
But the still recent market turmoil of late 2014,

highlighted above, exposed the frailty in several
markets and economies, most affected by the crisis
Graph 2 Portuguese exports () of goods by
that started seven years ago. Confidence in a
destination - 2014
better outlook for these economies, such as the

Portuguese, is not being fully supported by
economic fundamentals. Besides, sovereign debt
is still mounting, and the high external debt is yet to
show a decent decrease. In fact, Portugal ended
2014 with a positive GDP growth (+0.9%), mainly
supported by private consumption, which more than
compensated for the negative contribution from
external demand. It should be noted that, between
Source: INE, calculations by CMVM.
In a statement on the Portuguese economy on 17 March 2015

http://www.imf.org/external/np/ms/2015/031715.htm
2013 and 2014, household savings as a percentage
somewhat expected, it is troubling to notice that other
of disposable income fell from 8.7% to 6.9% and
destinations did not compensate this fall. In fact,
credit to consumption picked up to reach a four-year
Portugal performed badly with its non-EZ partners in
high by March 2015. GDP growth was in itself at odds
early 2015, loosing demand in Angola, Russia,
with what would be expected if the Portuguese
Turkey, Saudi Arabia, USA, China and Algeria. The
economy was aligned with its most relevant partners;
relatively better performance in the Netherlands and
it compared poorly, for instance, to Spain. Portugal
France was too little to balance things out.
recorded the lowest growth rate of the year in

2014Q4 (0.7%, compared with the previous year).
On the contrary, Spain continued to gain momentum,
finishing with a 2.0% GDP growth between the final
quarters of 2013 and 2014. Moreover, throughout
2014, trade imbalances deepened (fuelled by higher
imports due to internal consumption). The first data
for 2015 shows a mixed evolution, with the
Portuguese goods exports and imports decreasing in
January (when compared with the same period of
2014), to recover in the following month. Whereas
lower imports can be mostly explained by an
abnormal base effect, the uncertainty in goods
exports is worrisome. Low oil prices and some
geopolitical instability have taken a toll in the
consumer drive of the most recent and important
buyers, leading to a steep fall in Portuguese
exports to several countries. A trend that the
Portuguese economy, at least for the time being,
has not managed to counterbalance by gaining
enough market share elsewhere.
The situation has been particularly serious in oil

producing countries such as Angola or Brazil. In
2014,
Angola
was
the
fourth
destination
of
Portuguese exports and Brazil the eleventh. The

economic impact in the Portuguese economy
goes beyond a shrinking demand. In recent years,
many Portuguese companies directed their main
activity towards Angola or Brazil to exploit the
potential of those economies and mitigate the impact
of weak domestic prospects. This led many
Portuguese to migrate to Angola, Mozambique or
Brazil. If the prospects are not reverted relatively
quickly, the situation can lead to further erosion in
SME profitability and to a significant return of working
age people. With the currently slow pace of net
job creation in Portugal, this could create
additional stress to the Portuguese social
welfare and could hinder the recovery of an
already fragile economy. In the case of Angola, the
impossibility to repatriate capital, together with the
devaluation of the kwanza, are additional sources of
The single most important market contributing to the
concern to Portuguese companies that are highly
external trade evolution in Portugal in the first months
dependent on the Angolan market.
of 2015 was Angola, stricken by the steep fall in oil

prices, its most important source of revenue. Even
though the effect on exports to Angola could be
All these troubling signs come on top of a sevenmonth downward trend in the economic activity
indicator6, which finally stabilised in February 2015.

Moreover, the latest data (February) for the Near
Term Production Quantitative Indicators reveal
negative signs in the industry, construction and
services sectors. On a brighter note, the Near Term
Qualitative Indicators continued to exhibit an upward
trend, in spite of the abrupt fall in the Consumer
Confidence Index (April 2015). Conversely, the
beginning of 2015 brought a significant decrease in
the investment intentions stated by Portuguese
companies, compared with what they reported in
mid-2014 (a decrease in combined investment
intentions of -2.2%, against the 1.1% increase
reported earlier).7
temporary jobs (internships and apprenticeships).

Are the first 2015 external trade results to be
confirmed? Will exports regain momentum as the
European Commission predicts in its spring
economic forecasts? And to what extent is the
huge decrease in investment that marked the
Portuguese economy since the 2008 crisis to
blame for a seemingly sluggish recovery when
compared
with
some
of
Portugals
most
significant economic partners? According to the

IMF, the potential growth of the Portuguese economy
should hover around 1.25% in the upcoming years,
due to low investment, considered insufficient to
revert the effects of the accumulated capital
For Portuguese CEOs, the lack of demand
decrease of prior years. Data from the European
continues to be the single most important
Commission
difficulty. The threat of diminishing profitability
Portuguese stock of capital per employee was
also
just about half the EZ average, comparing poorly
seems
to
be
dampening
investment
prospects. Note that managers are increasingly

using their companies own resources to support the
intended investment, and resorting less to banking
credit.
On
also
show
that,
in
2014,
the
to Greece, Spain, Ireland and Italy.

These are some of the questions to follow in the
upcoming months and whose answers will determine
the seriousness of the hardship and vulnerability of
brighter
note,
positive
labour
market
the Portuguese economy, for instance, in the event
expectations do exist, in line with one of the
of a change of cycle in the global economy. For the
improving indicators for the Portuguese economy in
time being, the Portuguese economy seems to be
2014: a decline of the unemployment rate to 13.7%
dragging along, unable to fully take advantage of
in 2015Q1. This decline was made possible by an
the low oil price/low euro combination.
actual increase in the number of jobs available, by
Some further insights on economic prospects:
the still enduring emigration flow, but also by the

success
of
public
policies
actively
boosting
The last time the expectation of a reinvigorated

economic growth had to be revised can be traced
Computed by Statistics Portugal.
Statistics Portugal, Investment Survey, January 2015.
back to the World Economic Outlook (WEO) of
regions. Moreover, economic developments in
October 2014, when the global macroeconomic
emerging economies are not promising and are
outlook for the coming months and years became
driven by low growth and commodity prices. The net
less optimistic (the IMF revised downwards the 2014
effect of commodity prices on commodity-
and 2015 global growth rates). On their part, the IMF
importing countries is not clear and will probably
dedicated some attention to the hypothesis of a
depend on the magnitude of the dollar appreciation
Secular
Stagnation
Scenario.
Stagnation Scenario speaks
This
Secular
and on the evolution of commodity prices, as those
volumes
on the
two elements can cancel each other out.
worrisome consequences that a low-growth, lowinflation environment could potentially have and, if
this scenario should materialise, it could affect
developed economies in a most significant way.
The latest WEA (April 2015) reveals a slightly
more optimistic but still prudent
IMF8:
() The
Furthermore, government consolidated gross debt

as a percentage of the GDP in Portugal has risen in
recent years, increasing 34.0 percentage points
between 2010 and 2014. For the EU-28, the change
equals to 8.6 percentage points, on average. In
2014,
government
consolidated
gross
debt
distribution of risks to near-term global growth has
represented 130.2% of the Portuguese GDP, against
become more balanced in relation to October 2014,
an average of 86.8% for EU countries.
but is still tilted to the downside. (). For the IMF,

macroeconomic prospects are not consistent across
the world: positive recovery signs in advanced
economies but economic decline in emerging
economies. The forecasts point to an increasing
discrepancy between the two sides of the Atlantic: a
3.5% growth rate in the US, against 1.1% in Europe.
The European and the Japanese economies risk
experiencing a period of economic stagnation.
The IMF recommends accommodative monetary
policies, complemented with structural reforms and
better fiscal frameworks, in order to pick up growth
and reverse the poor investment climate in those
In line with the latest OECD Interim Economic Assessment,

consulted
on
18
March
http://www.oecd.org/eco/outlook/economicoutlook.htm
Graph 3 Differences in the latest consecutive GDP
Graph 5 Government Consolidated Gross Debt as a
forecasts for selected Countries
Percentage of the GDP
Source: AMECO, European Commission, Winter 2015 forecast. *Estimate; p-
Source: Eurostat.
Provisional.
Graph 4 GDP at market prices (2005=100)
Graph 6 Per Capita GDP at market prices ()
Source: Eurostat.
Source: Eurostat.
Following these insights, it may be fruitful to analyse

how the per capita GDP evolved in recent years. In
Graph 7 Overdue loans - Portugal (in % of total

credit granted)
Portugal, per capita GDP at market prices exhibits a

negative trend between 2010 and 2012. More
importantly, Portugal has been diverging from its EZ
peers: in 2009 the per capita GDP of Portugal was
60% above the EZ's per capita GDP, having
declined to 56% in 2013/2014.
According to the latest data on non-performing loans,
both non-financial corporations (March 2015) and
households (December 2014) continue to beat
previous all time-highs in Portugal, albeit with lower
increments among the NFC. The analysis of the
different categories of Portuguese NFCs with
Source: Banco de Portugal, calculations by CMVM. * - Data for 2015Q1

(only for Non-Financial corporations).
overdue loans is also revealing. Considering both the

difference between the biggest (above 5 million)
and the lowest (below 20 thousand), and the
difference between the second highest (1 million to
5 million) and the second lowest (20 thousand to
Graph 8 Difference in the breakdown of the % of

non-financial corporations with overdue loans
50 thousand) loan percentage intervals, the bigger

the loan, the higher the number of nonperforming
contracts.
This
is
worrisome
indication of the health of the Portuguese economy.

In
2014,
some
signs
of
performance
gap
improvement among the most extreme cohorts is

countered by an increased degradation in the quality
of loans ranging from 1 million to 5 million. Even
though not shown in the depicted time series, this
recent evolution since the end of 2013Q1 - comes
more from lower creditworthiness among NFCs
that took large loans than from a significant
improvement among small borrowers.
Source: Banco de Portugal, calculations by CMVM. Note: Latest

available data - December 2014.
The global level of new loans has been erratic,

with no clear trend in the last couple of years but
at a lower level than before the crisis. Nominal
interest rates, on the other hand, have now returned
Graph 9 Gross total doubtful and non-performing

loans in the balance sheets of domestic banking
groups and stand-alone banks (% of total debt
instruments and total loans and advances)
to pre-crisis levels or even lower: in a smother way

for loans up to 1 million, and with a remarkable
move since the second half of 2014 for loans above
1 million.
Considering that non-performing loans are a good
proxy for financial distress in the economy, the
assorted indicators depict a gloomy scenario. With
very few exceptions Germany is one of the most
notorious credit quality in the EZ has diminished
since 2008.
Broadening the scope to all debt issuance, the
Source: ECB
overall net issuance of debt securities in Portugal has

been negative for several quarters, reaching some of
the lowest figures of the series during 2014, and the
Graph 10 New loans, respective interest
minimum for the issuance of long-term debt

securities in 2014Q4. For NFCs, after positive net
issuance in 2012 and 2013, 2014 brought a first half
of the year with the lowest (negative) figures at least
since 2005, with a slight recovery in the latter half of
the year.

available data 28 February 2015.
Graph 11 Net issuance of debt securities Short-
Graph 12 Outstanding amounts of debt securities
vs Long-term - Portugal
issued by NFCs - Portugal
available data 2014Q4.
available data 28 February 2015.
Graph 13 Net issuance of debt securities by NFCs
Graph 14 Net issuance of long-term debt
- Portugal
securities by NFCs - Portugal
For Portuguese households the credit crunch has
level. In fact, the indebtedness ratio is the lowest
been ongoing for more than four years now and the
(85.4% of GDP) in the last known observation, in
relative weight of mortgage-based loans climbed
December 2014 lower than by December 2007. In
from 79% in December 2007 to 82% in February
the case of private corporations, the last seven
2015. It is among consumer loans and not so much
quarters contributed decisively to move away from
among mortgage-secured credit that non-performing
the peak (162.5% of GDP) recorded in March 2013,
loans have risen the most.
but by December 2014 (141.8% of GDP) it is still
The latest available figures (February 2015) show,
higher than during the 2007-2010 period.
nonetheless, a different pace in the still negative rate

of
change
in
credit
granted
to
Portuguese
households, possibly hinting at a change in the trend.

In late 2014, and for the first time in several years,
Graph 15 Change in credit extended to households
there was a positive change in consumer credit. An
in Portugal and the Eurozone (mortgage and
occurrence that, for the time being, was not repeated
consumer credit) - %
in 2015, although the negative rate of change

remains much smaller than in the period 2010
2013.
With the exception of 2014, consumer credit for EZ
households shows a reduction in the pace of
contraction. In Portugal, the overall outstanding
loans for households has decreased by 13.0% since
its peak in late 2010, while it increased by 0.9% in
the EZ during the same period.
Looking at the latest indebtedness data of private
corporations and individuals9 and considering not
only loans but also debt securities (nominal value)
and trade credits, the deleveraging process shows
significant results. There has been a slow but
stable reduction in the families indebtedness
The scope goes beyond households. It also considers selfemployed entrepreneurs and non-profit institutions serving
households.
Source: ECB
Taking a closer look at private corporations by size
Graph 16 Private Sector Indebtedness (% real
of workforce and non-financial holdings 10 only
GDP)
micro-, small- and medium-sized enterprises

(SME) are now clearly below the respective
indebtedness level of late 2007. The indebtedness
of large corporations (until September 2013) and
non-financial holdings (until March 2014) continued
to increase. In December 2014 and after about one
year of deleveraging, the indebtedness of large
corporations increased once again.
It should be stressed that according to an analysis by
Banco de Portugal11 of data that comprises the years
2011, 2012 and 2013, most of the deleveraging
among private corporations occurred in the

context
of
debt
write-offs
resulting
from
Graph 17 Indebtedness of Private Corporations by
bankruptcies (particularly in the real estate and
Size of the Corporation and Non-financial holdings
construction sectors) and only a minor fraction
(% of real GDP)
comes from actual deleveraging of enduring

companies. A situation that Banco de Portugal
expects will endure in the coming years.
If the debt level is correctly identified as an obstacle
to
the
development
of
Portuguese
private
corporations and the overall growth prospects of the

economy, the bulk of the data presented here shows
that this problem is on its way to be solved. But this
could be a very simplistic way to look at these figures.
As already shown, the new loans contracted with the

10
This data includes non-financial holdings in order to account for

the total debt of private corporations.
11
In Boletim Econmico, May 2015.
banking system have been slowly decreasing,
among private corporations will depend on the
although with high volatility, mainly loans above 1
soundness
million. Thus, the higher indebtedness, mainly
fundamentals of the economy.
among large corporations and non-financial

holdings, even with GDP growing again, could only
be explained by the rise of debt securities and
trade credits. But, as stated, this is not necessarily
happening with micro- and small-sized enterprises.
The conclusion of a still fragmented access to capital
markets is strengthened by the sustained - if not
increasing - small versus large loan interest rate
spread and the absence of SMEs from stock
markets.
of
the
investments
and
on
the
In the meanwhile, the ECB took bolder monetary

policy decisions as a reaction to the feeble aggregate
demand of the EZ and to the successive decrease in
inflation departing further and further away from
ECBs price stability goal (i.e. EZ inflation hovering
around 2%). The full blown QE that the ECB has
been deploying since the beginning of March came
after a period when seemingly all the liquidity that the
ECB injected was insufficient to budge the velocity of
money,
at
least
in
the
intended
direction.
Nevertheless, for Portuguese CEOs, access to
Nevertheless, the still recent QE could have changed
new capital or liquidity is not one of the main
the picture on this subject.
obstacles to business. Time and again, data from

Statistics Portugal (INE)'s Investment Survey has
identified lack of demand as the main difficulty
for business development
in
Portugal,
as
previously stated in this report.
Adding up to the still existing inflation differences that

create a considerably more challenging background
for corporations looking to thrive in Portugal (when
compared to the ones in Germany), there is still a
price depression slowly but steadily spreading
On the other hand, a progressive phasing out from
across
debt to self-financing is shown when the CEOs are
announcement of the QE programme (in January
enquired on the sources of financing. Moreover,
2015) could have played a role in the recent
even though nominal interest rates have been
increase in the Harmonized Index of Consumer
clearly decreasing, the real cost of money has
Prices (HICP).
been increasing.
the
EZ
countries.
The
mere
The real estate market has been one of the focal
In part, the nominal price fall is explained by a
points for risk transmission across multiple sectors.
reduction in transportation costs (lower oil
From the US-born sub-prime crisis to the latter
prices), but
been
bubbles in Spain and UK, weariness over real
diminishing. This could lower the probability of
estate has increased, making it a crucial area of
prior viable businesses to endure and can, in the
financial stability analysis. Currently, China is
near- to medium-term, pose significant solvency
probably
risks. In the end, the soundness of the lasting debt
economy, but Brazil, the Netherlands and some
core inflation has also
the
most
real
estate
bubble-prone
regions of the UK are frequently under the radar for
market, a mix of new sources of demand (from China
new bubble identification. In Portugal, no actual
and France, mainly due to the Golden Visa
bubble burst occurred in the aftermath of the financial
Programme12), but also a return of Portuguese
crisis but real estate investors took an unavoidable
investors to the market are seldom quoted as main
toll. The housing market contracted at least since the
drivers. According to some recent statements by
beginning of 2010 until the end of 2013Q1.
real estate agents from the biggest firms
The high real estate market illiquidity, combined

with non-performing loans put banks under
stress and brought about potential conflicts of
operating in the Portuguese market, local

investors could be fleeing from financial markets
due to both a lack of trust and lower yields.
interest in highly verticalised financial groups
To what extent will this movement continue to drive
with stakes in insurance, mutual funds and asset
the market? To what extent will prices pick up in other
management, and even regulatory arbitrage. This
segments? How will this movement affect (positively
has been one of the action matters for the
or negatively) other sectors via capital flows? For the
Portuguese tri-party financial supervision authorities
time being, in the aftermath of a couple of very harsh
over the last few years.
years for all market players, a moderate increase in
The current data on the real estate market shows a

pickup in the number of houses sold and more
significantly in prices. Nonetheless, the increase in
prices (more notorious in regions with more tourist
appeal such as Lisbon and the Algarve) has been
barely accompanied by real estate banking
appraisal values, which signals that banks are
still prudent and probably not so important as
market players as they were in the past. The
Portuguese real estate market had a revival during
2014, mainly in the high-end housing market.
Commercial
renting
also
shows
good
signs,
especially in Lisbon. For the resurgence of the highend housing market, which is boosting the whole
12
The Portuguese government put in place a programme where it

exchanges a resident permit for a 500.000 investment in the
country (frequently done via real estate investments).
prices and sales contributes to lowering the riskiness

coming from this market and to mitigate some of the
still ongoing distress. Nevertheless, under an
environment of increasing liquidity provisioning
to
financial
markets
and
under
global
movement of search-for-yield, the real estate

market should be kept under close surveillance,
both domestically and internationally.
Graph 18 Velocity of Money in the Eurozone
Graph 20 HICP Selected countries and Eurozone

(percent change)
Source: ECB, Eurostat, calculations by CMVM.

Note: Latest available data 2014Q4
Graph 19 Spread between 12-month Euribor and
Source: Bloomberg, Calculations by CMVM. Note: Latest available data

31 March 2015
Graph 21 Number of Houses Sold
Harmonised Index Consumer Prices (HICP) - Portugal

and Germany (percentage points)

Source: Bloomberg, Calculations by CMVM.
Note: Latest available data 31 March 2015
31 December 2014.
Looming and latent risks from a macroeconomic
Graph 22 House Price Index (yoy) - %
perspective
To better put in perspective the current levels of

interest rates, sovereign yields and asymmetries
between the European Union and the EZ countries,
a group of additional indicators is considered and
computed. To begin with, the frequently quoted
sentence that the EZ is recording historically low
interest rates and, more generally, a historically
low price of money must be taken with caution.
ECB reference rates, Euribor and even sovereign
yields are nominally at or close to minimum historical

2014Q4
values, but a different picture emerges when inflation
Graph 23 Housing Banking Appraisal Values by
is discounted. The HICP also records the lowest
Region and Total
values in several countries, with outright negative
(euros/m2)
price changes occurring in Portugal, Spain and

Greece, among other countries.
Furthermore, several competing investment options
record historical minimums, but this says little of the
evolution of their relative attractiveness from the
point of view of yield seeking investors. For
instance, even though the 10-year sovereign
yields in Portugal have been at the lowest
nominal value in history, the 12-month Euribor
spread (a usual reference for return on savings
deposits) makes sovereign yields ceteris
paribus much more attractive now than before
2009.
Source: INE, calculations by CMVM. Note: Latest available data 28

February 2015
Additionally, when sticking to comparing the same

class of investments, the yield spread (vis--vis
Germany) of Portuguese 10-year sovereign
Graph 24 Spread between Portuguese 10-year

sovereign bond yields and 12-Month Euribor
(percentage points)
bonds is still clearly above its level prior to the

financial crisis or even after. This happens both
when considering nominal and real data (discounted
by each countrys HICP). For sovereigns, the real
interest rate that each country has to pay reveals
a scenario that is far from the pre-crisis level. The
nominal and the real effort to sustain each euro of old
or new debt has diminished for most of the EZ
countries since the crisis highs but it has not
collapsed to historical lows as an untrained eye
would state while looking only at nominal yields.
The fragmentation of the sovereign market becomes
quite evident when comparing sovereign yield
Source: Bloomberg, calculations by CMVM. Note: Latest available data
spreads. Entering a protracted low inflation
31 March 2015
period
could
erode
sovereigns
ability
to
maintain the fiscal revenue at the levels required

to service the debt and could undermine the
capacity to decrease spending without triggering
a deflation spiral.
On the other hand, the reasons for the actual
decrease in real yields and spreads could reveal an
additional
problem
given
that
macroeconomic
fundamentals have not vigorously improved. The

external and sovereign debts have but increased in
the last years in countries like Portugal and the
prospects for economic growth are feeble.
Graph 25Nominal Bond Yields (10-year
Graph 26 Spread Towards German 10-Year Bond
government bond yield) Percentage Points
Yield in Nominal Terms Percentage Points
Source: Bloomberg, calculations by CMVM. Note: Latest available
data 28 February 2015
Graph 27Real Bond Yields (10-year government
Graph 28 Spread Towards German 10-Year Bond
bond yield minus HICP inflation rate) Percentage
Yield in Real Terms Percentage Points
Points
The additional yield that sovereigns still pay when
economic background recommend that this risk is
compared to lower risk, investments within the EZ
not neglected but instead considered one of the most
and across the globe, along with a global shortfall of
serious
secure assets (like US and German sovereign debt),
probability of occurrence. The expectations of a
could have been spiking high yield sovereign bond
protracted period of low or negative inflation
demand, thus lowering yields for riskier sovereign
combined with low growth, austerity weariness
debt, creating a market driven in a manner not far
in most of the EZ countries and important
from the workings of a junk bond market. This
political dissent within the EZ could put at risk
apparently increasing global search for yield
not only the external debt sustainability in
could be hampering risk assessment and sound
several countries but also the very integrity of
price formation, and
the EZ.
in
the event
of an
unexpected exogenous shock, it could lead to

the unfolding of a systemic event.
Against
this
and
with
moderate
Worldwide, there have been lower inflation tensions,

with some research centres stating that overall
policy
inflation in 2014 should have decreased to somewhat
instruments intended to fight deflation risks
short of 4%. Not surprisingly, with global economic
could turn out to be themselves a risk factor. In
growth not accelerating significantly over the last 12
other
and
months (data from mid-April 2014 until mid-April
articulated with complementary policy actions that
2015) commodity prices have decreased (zinc is an
prove to be clearly effective in fuelling sound
exception).
words,
economic
background,
in consequences
if
not
investments
monetary
carefully
and
envisaged
the
indispensable
demand, monetary policies could be a risk factor.

Achieving real economy yields, which divert
investments from search-for-yield and bubble-
At the same time, the co-movement of the returns of

a series of different financial instruments has
changed considerably over recent years, meaning
that contagion risk or/and interconnectedness
prone markets seems to be critical at this point.
havent had constant intensity. The variance
The subject of euro sustainability and resilience
explained by the first principal component increased
recently appeared in the public agenda again, to be
in 2014 and the first two months of 2015, signalling
quickly rebuffed
complete
a potential increase in contagion risk. 13 The
commitment from ECB officials. The economic
increasing financial integration of public and private
fundamentals portrayed here and the remainder non-
debt markets around the world might be a plausible
13
USA 10-year sovereign bonds, AAA Sovereign Debt, BBB Private

debt, EUR/CHF, EUR/GBP,EUR/JPY, EUR/USD, VIX and prices
of gold, silver, oil, wheat and natural gas).
by declarations
of
This composite indicator aggregates data from 23 different

series (DAX, Jones Industrial, Euro Stoxx 50, FTSE 100, Nasdaq
100, Russell 2000, S&P 500, Germany 10-year sovereign bonds,
France 10-year sovereign bonds, UK 10-year sovereign bonds,
explanation for such co-movement.

The
simple
correlation
Graph 29 Commodities (Price indices in USD;
between
equity
and
100 = Jan2009)
commodities is at a lower level than in the most

troublesome period of 2008-2012. Yet, the beginning
of 2015 shows a consistent conjoint behaviour in
both
markets.
The
relatively
low
correlation,
however, should prevent any dramatic conclusions.

Another looming risk that should be stressed at
this point comes from market-based financing. It
has been signalled as a significant risk, namely in
China and in the USA, and it is being tracked with
increasing interest in Europe. The European Union
recognises the importance of these activities and,
21 April 2015
together with the G-20, is committed to developing

proper mechanisms to increase data accuracy,
improve
transparency,
identification
and
and
promote
mitigation
of
better
Graph 30 Co-movement of Sovereign and Private
and
Debt Yields, Stocks, Forex and Commodity Indexes
risks
vulnerabilities of non-bank activities. The European

Commission has recently presented legislative
proposals on money market funds and on reporting
and
transparency
of
securities
financing
transactions.
In addition, the European Commission has put
forward a plan to build a Capital Markets Union,
aiming at strengthening the internal market of
financial services, diversifying funding sources and
mitigating the effects of the banking crisis on
taxpayers. However, in its current version, it is
strikingly omissive (for instance, it fails to address
28 February 2015
fiscal terms), which advises moderate enthusiasm

regarding its effectiveness.
The latest (April 2015) PMI indexes from Markit
reveal unexpected underperformance by European
Commodities
economies, hinting that the probable higher GDP

growth rate in 2015Q1 may not be sustained in
2015Q2. These figures give some substance to the
questions on the limits of the current growth rate
cycle in developed economies. A question that
resonates with the most recent advice from several
international financial institutions on the need for a
comprehensive policy approach to the economy,
given the existing evidence that markets are
repeating behaviours that led to the last financial
crisis. Overall, high demand for AAA sovereign
debt subsists across the globe, along with
search-for-yield strategies and an increase in
cash hoarding by the richest investors. This triad
does not represent a significant difference from the
21 April 2015
one witnessed one year ago. Like then, it represents

a frail background for predicting sustainable and
enduring growth and, consequently, for predicting
alleviation of overall risk perspectives for the near
future.
Graph 31 - Correlation between Equity and
3. Securities Markets
Graph 32 Stock Market Indices
Indicators
Equities & Equity Futures selected
indicators
The turmoil that began in mid-October 2014 was
prolonged until the end of 2014. By now it looks like
a blimp in an exuberant upward trend, more or less
common
to
most
of
the
international
stock
exchanges. Nikkey, S&P500, ISEQ, Eurostoxx 500

and MSCI World have all recorded the highest
Source: Bloomberg. Note: Latest available data 21 April 2015
levels at least since January 2009 in the most

recent weeks. In some cases, even historical record
highs have been broken during the first months of
Graph 33 Equity Realised Volatility
2015. PSI20 exhibited one of the highest returns

since the beginning of 2015 (26.6% on 21 April). The
slightly better economic prospects could partially
justify this, but the ECBs QE policy along with the
still accommodating stance of the monetary policy by
the FED and the loose monetary policy in Japan are
the prime suspects for boosting the stock exchange
markets worldwide in the first four months of 2015.
Volatility clearly decreased in the first months of 2015
in almost all financial markets.
By mid-April, VIX recorded the higher value (lower

risk) compared to VSTOXX and PSI20 VaR.
Graph 34 Difference between the stock market

earning yield and the 10-year Treasury bond yield
Throughout April, some increase in volatility and

Value-at-Risk in PSI20 could be explained by
lingering doubts on the European negotiations on
Greeces additional financial aid and by the potential
contagion that an ill outcome could bring, while, in
the second half of 2014, the increase was related to
the winding up of BES.
If one looks at the relationship between the earnings
yield (E/P) of stock indexes and 10-year Treasury
bond yields (Y), in the long run, both variables tend
to move in the same direction. Intuitively, bonds and
stocks compete for investment funds and those
funds tend to move towards the more attractive
investment.14
As of May 2015, the difference between the stock
market earning yield (E/P) and the 10-year Treasury
bond yield (Y) ranges between 3% and 4% in some
economic regions, but not in Portugal. This is to say
that, according to this model, stocks are cheap, when
compared to Treasury bonds. Concurrently, the
likelihood of having a bubble burst in the near future
is higher for the bond market, as this market appears
to be overvalued vis--vis the equity market.
14
Criticism often laid on the Fed model is that it compares a

nominal quantity (Y) to a real quantity (E/P).
Source: Bloomberg. Note: Latest available data 29 May 2015
In the case of Portugal, the indicator has exhibited a
Graph 35 Value-at-Risk, selected indices
large negative value since 2011 but with an upward

trend since 2013. Until 2012, this emanated mainly
from the large default risk perceived by investors on
Portuguese sovereign debt (which continues to
present a large spread in comparison to German
bonds with the same maturity), but from then on, the
comparatively steeper fall in the Portuguese stock
market earnings also played a relevant role.
Concerning investor sentiment and stock market
activity, the positive sentiment recorded an upward
trend since January 2014, while negative sentiment
decreased during the first half of the year. In the
second semester of 2014, there is an increasing
interest for negative search terms, probably due

to the news about the Portuguese banking
sector. The search for positive terms was again
stronger
over
the
first
quarter
of
2015.
Meanwhile, the Economic Sentiment Indicator for
Graph 36 Positive and Negative Sentiment (weekly

data) and Economic Sentiment Indicator
the Portuguese economy recorded a seven-year

maximum in March. Both measures correlate with
aggregate stock market returns. However, the
strength of these correlations varies over time. The
correlation of stock market returns with the positive
sentiment is positive for 75% of the 52-rolling weeks
from January 2009 to March 2015, and with the
negative sentiment, it is negative for 83% of the 52rolling weeks under analysis.
Source: Google Trends, European Commission, Calculations by CMVM.

Note: Latest available data 28 February 2015
Graph 37- CAPE S&P 500
Source: Bloomberg and CMVM (own calculations). Note: Latest available

data 31 December 2014.
Graph 38 PSI20 CAPE and Earnings

2014Q4
Graph 39- CAPE MSCI EMU
Source: Bloomberg and CMVM (own calculations). Note: Latest available

data 31 December 2014.
Graph 40 Price to Book Ratio - Banks
Source: Bloomberg, calculations by CMVM.
The
Cyclically-Adjusted
Price-Earnings
Ratio
Graph 41 Net Present Value of Growth Opportunities
(CAPE) of S&P500 is very close to its 15-year

historical average at the end of 2014, while, in the
case of MSCI EMU, it also deviates slightly from the
10-year historical average.15 Nevertheless, using
state space models (not depicted) or a lengthier
historical average, we witness above average CAPE.
Regarding Portugal, CAPE is below 14 at the end
of 2014, which contrasts with the 18.7 observed
for 2014Q1. This evolution may be justified by the
extraordinary events that affected two relevant
PSI20 firms: the bankruptcy of Banco Esprito
Santo,
and
important
losses
in
short-term
Source: Bloomberg, calculations by CMVM. Latest available data 2014Q4
investments of Portugal Telecom in Grupo Esprito

Santo commercial paper. The structural earnings of
Graph 42 PSI20 monthly average dividend yield
Portuguese firms dropped by more than 20%

between 2011 and 2014.
Similarly to European and US banks, the price to
book ratio of Portuguese banks has decreased since
the beginning of the century. However, after the
European sovereign debt crisis, the Portuguese
financial institutions have revealed higher financial
stress, probably due to higher negative forward
looking investor confidence.
Analysing the weight of the net present value of
growth opportunities (NPVGO16) on stock prices of
30 April 2015
15
A difference that, for the Eurozone, is amplified when using the

alternative approach, which relies on an unobserved component
model specification to disentangle the trend and the cycle
components from the series of earnings.
16
NPVGO is calculated considering 12 firms quoted in Euronext
Lisbon. Stock prices, earnings per share and cost of capital are
value-weighted.
0 =
1
0
0 , where 0 is the stock
price on period 0, 1 are the earnings per share on period 1,

0 is the cost of capital of firms on moment 0 (assumed constant
and equal to 8.5%) and 0 is the net present value of
growth opportunities on period 0.
Portuguese firms, a positive trend is apparent,
also reveals the implications arising from the
suggesting that investors are putting more emphasis
recapitalisation of Portuguese banks (2012) and the
on the future growth opportunities and dividends. It is
winding up of BES and the short-term investments of
yet to be determined if the behaviour in the second
Portugal
half of 2014 is a mere blimp or a reversion of the
commercial paper (2014). These recent events
trend.
explain the different CISS evolution in Portugal,
The monthly average dividend yield of PSI20 stocks
Telecom
in
Grupo
Esprito
Santo
when compared to the EZ.
stood near 3.7% from the beginning of 1999 to April2015, with a positive trend, almost mirroring the
evolution of PSI20. After its peak in 2011 (and
coinciding with low GDP growth rates), the dividend
Graph 43 Average implied risk premium - Portuguese
yield has stayed below the average for most of 2014,
Markets
again suggesting expectations of higher growth

opportunities and dividends in the future. On the
other hand, the average implied risk premium17 in the
Portuguese market stood at around 8.4% between
1999 and 2014. From 2000 to 2014 the Portuguese
PSI20 presents an annual average return of -2.60%.
The Portuguese version of CISS (Composite
Indicator of Systemic Stress)18 reached a maximum
in 2009, following the subprime crises that ultimately
led to the collapse of Lehman Brothers. The indicator
also captures risk events as financial stress following
Source: Bloomberg, calculations by CMVM.
the political crisis (summer of 2013). Moreover, it
17
The implied market return was obtained considering a

diversified stock portfolio and the dividend discount model,
weighted by stock market capitalisation. We consider 5Yr Euro
Generic Govt Index to be risk-free.
18
CISS is the weighted average of five sub-indices, calculated
based on the portfolio theory approach (where the sub-indices
aggregation reflects their time-varying cross-correlation structure)
and is available on a weekly basis; each sub-index comprises
three stress indicators, normalised based on their recursive
sample CDF. Foreign exchange market (FEM) Indicators: realised
volatility of the euro exchange rate vis--vis the US dollar and the
British pound, maximum cumulated index losses over a moving 2year window (CMAX) of the Portuguese nominal effective
harmonised index. Equity Market (EM) Indicators: CMAX, realised

volatility, difference between CMAX for Portugal and Germany.
Money Market (MM) Indicators: realised volatility of the 3-month
Euribor rate, interest rate spread between 3-month Euribor and the
average of 3-month French and German T-bills; spread between
3-month Euribor and the OIS rate; Bond Market (BM) Indices:
realised volatility of the Portuguese 10-year government yields,
spread between 10-year Portuguese and German government
yields, yield spread between Iboxx corporation and German
government yields. Financial Intermediaries (FI) Indices: Realised
volatility PSI Financials, CMAX and Illiquidity Index (turnover data).
Correlation pairs are computed as exponentially-weighted moving
averages (EWMA) with a smoothing parameter of 0.93.
CISS is at a low level (around 0.1) during the first

semester of 2014 and then exhibits an upward trend
until February 2015, meaning that the level of
Graph 44 CISS for Portugal, contributions coming

from each of the sub-indices and the overall
contribution from cross-correlations (weekly)
systemic stress in the Portuguese financial

system has increased in recent months. The
increasing level of systemic stress during this period
comes mainly from the financial intermediaries
segment and from the equity market. However, the
cross-correlation component reveals a relative
divergence of some of the segments, an evolution
which is in line with more tranquil periods.
Bonds & Credit Derivatives

In the aftermath of the financial crisis that eventually
Source: ECB, BdP, Bloomberg, Calculations by CMVM. Note: Latest
led to the sovereign debt crisis, a bust and boom
available data 27 March 2015
cycle seems apparent in the sovereign debt yield of

countries like Portugal. Especially since mid-2010,
the 10-year sovereign yields soared and peaked in
mid-2012, only to begin a clear descent path that
brought yields close to or even below pre-crisis
figures.
The still weak economic prospects and steady
declines in prices raised concerns among Central
Banks. The Bank of England, the Bank of Japan, the
US Federal Reserve and more recently the ECB
engaged in accommodative monetary policies.

Quantitative easing programmes, in particular, exert
a downward pressure on bond yields. Threats of
long periods of deflation led the ECB to
massively purchase sovereign bonds in the
secondary market. Sovereign bond yields in the EZ
are being pushed close to zero, reaching minimum
nominal historical levels in almost all member states.
In early May 2015, both 2- and 5-year Germany
sovereign bonds recorded negative yields. On 21
April, the yield on 10-year Portuguese sovereign
bonds was below 2%.
The ECB purchase programme is contributing to
lower bond profitability, compromising the sovereign
bonds role as government credit instruments:
Portuguese 10-year sovereign bond yields are
similar to the 10-year US or UK sovereign bond
yields. This can eventually distort investors
incentives to acquire Portuguese bonds and
undermine
the
countrys
ability
to
raise
additional capital. The evolution of sovereign bond

yields in the EZ is being closely followed by several
market analysts as the ultimate proof of the success
or failure of the QE.
Graph 45- 10-Year Sovereign Debt Yields
Graph 46- 10-Year Sovereign Debt Yields - Other

Countries
data 21 April 2015.
data 21 April 2015.
Graph 47- Spread between 10-year and 2-year
Graph 48- Portuguese sovereign debt yield curve
Sovereign bond yields
data 21 April 2015.
data 21 April 2015.
ECB - Nonstandard Monetary policy

The risk of low inflation in the medium term led
the ECB Governing Council to announce
additional non-standard monetary measures in
January 2015. The asset purchase programme
was extended to include the Public Sector
Purchase Programme (PSPP), supplementing
the Asset Backed Securities and the third
The
purchase
of
supranational
debt
instruments is conducted by Banco de Espaa

and Banque de France; unless there is an
insufficient amount of bonds issued under the
NCBs' jurisdiction. In this situation, NCBs are
allowed to purchase supranational bonds. The
total purchase of supranational debt under
PSPP has a ceiling of 12%.
Covered Bond Purchase program, launched in
The PSPP will have a risk sharing of 20%: 8%
September 2014.
of the additional purchase made by the ECB
The Expanded Asset Purchase Programme
and 12% made by the NCB.
(APP) has a monthly target of 60 billion from
It is possible to buy bonds at a negative yield
March 2015 until, at least, September 2016.
maturity if it is above the deposited rate facility:
The new PSPP is conducted by the ECB and
at -0.2% since September 2014.
national central banks (NCBs) and is directed

towards the purchase of euro denominated
bonds issued by (i) Governments and national
agencies in the EZ and (ii) from a list of
international and supranational institutions.
On April 13, German 10-year bond yields

traded at 0.16% while both the two-year and
five-year recorded negative yields (-0.28% and
-0.13% respectively). Regarding the monthly
asset purchase objective, it is a matter of time
The eligible criteria of PSPP establishes that
before German 10-year yields drop below zero
marketable debt instruments must have a
or, in the worst case scenario, below -0.2%. In
remaining maturity of two to 30 years, with an
the latter German bonds would no longer be
issue share and issuer limit of 25% and 33%,
eligible under the APP. This could jeopardise
respectively. In addition, bond purchases have
the effectiveness of the programme and lately
to respect ECBs capital key on a monthly
compromise the ECBs primary objective.
basis. While the ECB cannot buy debt
Public sector bond purchases are limited by the
instruments of supranational institutions, NCBs
ECB's capital key, where Germany accounts
are only allowed to buy public sector bonds
for 25%, and by the purchase ceiling for
from their jurisdiction.
supranational bonds.
Graph 49- Spreads vis-a-vis Germany

Eventually, a substantial amount of the monthly
60 billion is at risk of not being invested unless
CDS of 5-year sovereign debt
the ECB revises the PSPP criteria. Although

there might be a shortage of safe trading assets,
negative yields reveal a certain aversion to risk
and a lack of confidence in the market. Agents
seem to prefer costly assets (in practice, negative
yields are perceived as a tax or cost for the
investor) rather than holding profitable but risky
investments.
For the time being, the spread of 10-year sovereign
yields between EZ member states is narrowed.
Financial market fragmentation in the last two years
has shrunk but it did not return to pre-crisis levels. On
21
April
2015,
the
difference
between
the

March 2015
Portuguese and German 10-year sovereign yields

was nearly 200 basis points, eight times higher than
in 2008. These spreads are passed on to the real
Graph 50- High yield bond issuance ( Billion)
economy and widen the gap between Member

States. As a result, Portuguese companies
currently face higher borrowing costs than in
2008, in relation to their German competitors.
Different obstacles to credit access hinder
competitiveness and harm efforts to regain
market attractiveness.
Over the past few years, the Portuguese sovereign
yield curve has experienced a parallel downward
shift and the slope became steeper. This is also the
case for other European member states. But the
spread between 10-year and 2-year bond yields is
today much more pronounced in Portugal than in any
Source: Dealogic via AFME.
other member state (except for Greece). On 1
2014Q2, European high yield bond issuance has
January 2008, the said spread for Portugal and
outpaced the American one.
Germany was 40 and 34 basis points (bp),

respectively; it reached 200 and 37 bp, respectively,
on 21 April 2015.
Even though the analysis focuses on high yield

issuers19 (with rating equal to or lower than BB+) it is
possible that, during the period under review,
After a highly unstable period, Portuguese sovereign
substantial changes have occurred in the universe of
yields are following an adjustment path, but the
eligible bonds. Issuance volumes are probably
spreads can also signal different economic prospects
moving from investment-grade companies to (high
for Portugal and Germany. The economic outlook
yield)
remains fragile, and there are still doubts on the
downgraded.
solution to the unsolved Greek sovereign debt
telecommunications
problem. Even though ECB and IMF officials have
leading industries in high yield issuance in European
been downplaying the consequences, in terms of
developed markets.
contagion, of a rupture between Greece and its

EZ partners, the potential repercussions of such
a rupture on countries like Portugal are an
important risk factor.
CDS spreads did not fall with the magnitude of the
sovereign yields, at least for Portugal. By the end of
March 2015, the spread of Portugal vis--vis
Germany was 3.6 times higher than in March 2008
(111.48 bp on 31 March 2015). Different risk
premiums between member states is now more
evident than before the financial crisis.
Sovereign debt of the most fragile EZ economies has
been spiking investors interest, but the search for
yield is also directed towards private debt. According
to Dealogic data, high yield bond issuance has
been increasing, with issuances from the USA
and Europe significantly above 2009 levels. In
19
Sovereign debt is not included.
companies
that
In
have
been
2014Q4,
and
cars/trucks
recently
machinery,
were
the
Graph 51 Investment management in Portugal (
Investment Management
Billion)
The year 2014 was marked by the Winding up of
Banco Esprito Santo (BES) and the inevitable
consequences that affected the several branches of
the financial group. With regard to the Asset
Management companies connected to BES, the
loss of investors was unavoidable, but no
relevant evidence of flight-to-safety abroad was
recorded in the aftermath of the winding up. The
most probable scenario was that assets ended up
being channelled to investment instruments of
competitor banks.
Source: CMVM.
In Portugal , up until March, the year 2015 brought a

recovery of Assets Under Management (AuM) of
Individual Portfolio Management (+5.0% since
December
2014),
while
Collective
Investment
Graph 52 Collective investment in Portugal by fund

type and private equity investment ( Billion)
stagnated in the same period. AuM of Collective

Investment schemes in Transferable Securities (CIS
in TS) continued to increase in 2015Q1 (+9.5%),
while
AuM
of
Alternative
Investment
Funds
continued to decrease (-3.5%). Real Estate funds

also recorded a reduction in AuM (-2.1%) in spite of
the higher real estate prices. With the exception of
flexible funds, the evolution of CIS in TS by fund type
reveals a continuous upward trend in AuM. Equity
Funds lead the sector with a significant increase
(+16.8%) during the first three months of 2015.
The AuM of Securitisation Funds barely changed
since the end of 2014 (a slight decrease), apparently
not affected by ECBs policy in this area (to buy funds
in the securitisation market).
Source: CMVM.
Graph 53 CIS in TS by fund type ( Million)
Graph 54 Net Inflows by Investment Instrument

(subscriptions minus redemptions) - Million
Source: CMVM. Note: Latest available data 2015Q1
Source: CMVM, APFIPP, ASF (Ex-ISP), BdP and IGCP.
Graph 55 Investment management in Portugal by
Graph 56 Variation of Net Asset Value by
fund class ( Billion)
Investment Instrument - Million
Source: CMVM.
Source: CMVM, APFIPP, ASF (Ex-ISP), BdP and IGCP.
In terms of the dynamics of subscriptions and
Graph 57 Principal Components of Mutual
redemptions, up to March, the year has been positive
Fund Flows - Portugal
for Public Debt (sold to individuals as Savings

Certificates [Certificados de Aforro] and Treasury
Bonds [Certificados do Tesouro]) in line with 2014.
But this is not expected to continue throughout the
year, as those products were refurbished with a
much less competitive return. All the remainder of the
investment instruments analysed had net in the
period (subscriptions minus redemptions close to
zero).
Regarding fund flows, PCA is used to construct linear
combinations of fund flows in order to detect general
patterns in how investors reallocate money across
Source: CMVM. Note: latest available data February 2015
fund categories.20 The first two principal components

explain most (56%) of the total variance in the data.
The first principal component (named generic
demand) weighs positively (although not uniformly)
across all fund categories, and hence may be
perceived as a generic demand effect, accounting for
the general shifts in and out of en masse investment
funds. The fact that the first principal component
alone explains about 37% of the variance in net flows
suggests significant co-movement among fund
investors in Portugal. It can be argued that this first
principal component captures a broad investor
sentiment pertaining to the investment fund sector.
20
Funds are aggregated into Bond Funds (including Bond Funds

of Funds and Bond Hybrid Funds), Equity Funds (which also
encompasses Equity Funds of Funds, Equity Hybrid Funds),
Money Market Funds and Treasury Funds. This approach is based
on the idea that a set of variables shares a latent structure, and
PCA is then used to isolate the underlying common features

across several time series while expurgating idiosyncratic
characteristics.
In
contrast,
the
second
principal
component
reverses to negative values, determined by net
indicates that the next most important driving force
outflows from Treasury Funds. Taken together, these
behind fund flows is a polarity between safer (Money
recent developments suggest that investor
Market Funds, Treasury Funds and Bond Funds) and
confidence in investment funds is back on the
riskier fund categories (Equity Hybrid Funds, Equity
path to recovery and that fund investors are more
Funds and Equity Funds of Funds). This risk-safety
willing to invest in riskier fund categories.
contrast suggests that, controlling for the generic

demand effect, when cash flows out of the riskier
fund categories, it tends to flow into the safer
categories, in what is generally referred to as flightto-quality. This, in turn, supports the idea that flightto-quality movements are also present within
fund flows in Portugal.
There has been a steady increase in demand for
investment funds from 2012 onwards, stemming
from positive net inflows into both safe and risky fund
categories. In particular, demand for safer funds
remained high until mid-2013, due to increasing net
inflows into Money Market Funds and Treasury
Funds. Towards the end of 2013, however, while
demand for risky funds continued to be positive,
safer
funds
recorded
substantial
outflows
(particularly Money Market Funds), suggesting a shift

away from safe funds and into risky fund categories.
During the second half of 2014, both the generic
demand and the demand for safer funds exhibit a
significant drop, on the back of a widespread
decrease in net inflows across virtually all fund
categories, suggesting a loss in investor confidence.
However, since the end of 2014, general demand for
investment funds shows a noteworthy recovery,
supported by substantial net inflows to Bond Funds,
but also Equity Funds. Furthermore, flight-to-quality
Trading
In most developed markets, the weight of lit venues
(i.e., traditional regulated markets) in the overall
Graph 58- Lit venue market share

(Portugal and Europe)
trading activity of stocks has been decreasing,

especially if compared to pre-crisis levels or even to
late 2008 figures. Portugal has been trailing some of
its European partners where this phenomenon has
been less intense. Nevertheless, the average weight
of the lit market decreased from 58.7% in 2013 to
56.3% in 2014 (72.4% in 2009), as the off-book trade
(i.e., transacted over the counter) increased to an
average weight of 39.6% (37.3% and 25.2% in 2013
and 2009, respectively). The most recent figures
represent a comeback of lit markets, as they
represented less than 50% of trading in several
quarters. This venue fragmentation and trading
dispersion
poses
challenge
to
market
Source: Fidessa, calculations by CMVM.
Graph 59- Lit venue market share

(Portugal and World)
oversight: important regulatory provisions still

differ between traditional exchanges and other
trading platforms.
Having established where and moving to how
much21 reveals that, in the second half of 2014,
aggregate liquidity declined in Portugal, Italy and
France, only to pick up again in the beginning of
2015. Market liquidity22 increased during the last
months in the
Source: Fidessa, calculations by CMVM.
21
The available data on liquidity refers only to lit market trading.
22
The Liquidity Composite Index (LCI) is computed by means of a

principal component analysis on nine liquidity proxies (bid-ask
spread, effective bid-ask spread, Rolls measure, market turnover,
turnover ratio, Lhh, Amihud Illiquidity Indicator, Zeros measure

and Market Error-Correction). When LCI crosses the X-axis
(denoting a value of zero), it means that the liquidity in that period
equals the average liquidity of the full period considered in the
sample. Conversely, a negative (positive) LCI indicates that
liquidity is lower (higher) than the sample average.
Graph 60- Market share of trading venues for PSI20

constituents
four countries under analysis, with France, Spain and
Italy already recovering to the figures recorded prior
to the Lehman Brothers' bankruptcy. The Portuguese
market was affected by a major shock that resulted
from the collapse of Banco Esprito Santo in July
2014. Thus, it is not surprising that the liquidity
indicator exhibits a negative peak in that same
month, and that it has remained below the sample
average.
While liquidity has been in a roller coaster for the
last couple of years in the Portuguese stock
exchange, short-selling, as a percentage of
market capitalisation, has been thriving, with an
Source: Fidessa, calculations by CMVM. Note: Latest available data

2014Q4
almost continuous increase between November

2012 and April 2014. Since then, a more wobbling
Graph 61 Composite Liquidity Indicator
behaviour has been revealed, almost as if reversing

to a high level mean value. The latest available data
shows, once again, high levels of short-selling
(as a percentage of market capitalisation).

February 2015
Transatlantic Trade, Investment

Graph 62 - Short-selling as % Market
Capitalisation Euronext Lisbon23
Partnership and financial transaction tax

The Transatlantic Trade and Investment
Partnership (TTIP), which includes financial
services, is expected to be concluded by the
end of 2015. Financial activity between the
two sides of the Atlantic is likely to spike. But
it raises questions regarding the ability to
increase data accuracy, conduct on-sight
inspections or assess the likelihood of
spillovers. Despite enhancing cooperation
between
the
American
and
European
authorities, the harmonising of regulatory

frameworks may compromise the ability to
legislate and undermine the effectiveness of
future rules. A good example is the European
Source: CMVM. Note: Latest available data 28 February
attempt to create a financial transaction tax
2015
(FTT). In January 2015 the Governments of

Austria, Belgium, Estonia, France, Germany,
Italy, Portugal, Slovakia, Slovenia and Spain
reaffirmed their intention to harmonise their
tax regime for financial transactions by
January 2016. This tax is not without risks;
FTT can eventually harm the capital markets
efficiency by promoting the relocation of
investments to non-participating member
states or a decrease in security issuance in
FTT jurisdictions.
23
Short-selling indicators use the short-selling positions reported

to CMVM (the statutory minimum reporting threshold is 0.2% of
capital stock, pursuant to EU Regulation 236/2012). The market
capitalisations of the shorted companies or the total market

capitalisation for PSI20 companies is in the numerator.
economies. Europe may face important capital
4. Looking Ahead and
outflows, with negative repercussions on market

confidence and liquidity. The impacts should be
Concluding Remarks
more pronounced in an open, small and fragile

economy as Portugal. This also resonates with
Looking ahead, the extent of the effectiveness of
doubts on the ability of the Portuguese exports to
the ECBs attempts to revive its transmission
regain momentum (as predicted in the European
mechanisms in order to financially support real
Commissions spring 2015 economic forecasts)
economy and bring inflation closer to the
and
monetary policy target will determine the outlook
consequences
for numerous economies in the upcoming
decrease in investment that has marked the
months. The results of the latest stress tests on the
with
the
question
of
the
regarding
already
the
significant
Portuguese economy since 2008.
EZ banking system revealed that several banks in a
The ECB has been increasingly assuming a looser
variety of member states were in need of capital,
monetary policy stance and it has broadened its
which somewhat contributes to the sentiment that the
intervention in volume and in scope (namely by
crisis in the European banking sector endures. The
directly buying corporate and sovereign debt in
recent case of Banco Esprito Santo in Portugal, or
secondary markets). This did not come without
the even more recent bond default of Heta Asset
criticism and some risks have been pointed out by
Resolution A.G. (the bad bank of Hypo Alpe-Adria-
several leading economists and even partially
Bank International A.G., created by the Austrian
admitted by ECB officials. It may entail risks,
government) also contributed to revive and highlight
especially if the monetary policy measures are not
the sentiment of a still debilitated banking sector in
precisely targeted. With TLTRO, the ECB signalled
Europe. In a nutshell, the profitability of the EZ
that the new lending facilities would not fund
banking sector still poses an important threat to
additional real estate credit. However, with the ABS
financial and economic stability in Europe.
and covered bonds purchase programme and, since
An environment of low interest rates and low growth

prospects poses several challenges to financial
stability. The combination of low inflation and excess
liquidity can lead to the emergence of Ponzi financial
schemes. Agents are prompted to take more risks
and actively search for higher yields. In the medium-
March 2015, with a full blown QE policy, it is

questionable if some of the targeted liquidity will
not end up on the usual bubble-prone markets.
This
preoccupation
finds
support
in
the
exuberant evolution of most stock market

indexes worldwide, which has seldom been
term, and in the absence of higher domestic
accompanied by strong economic growth.
return rates, investments may be diverted to third
The dual objective of strengthening bank capital and
deleveraging the most indebted banks, along with
real
the need to fuel credit to the real economy, has
exuberant behaviour of the ballooned securities
proven hard to attain. To stress the risks of the QE,
and real estate markets. Thus, further inducing
one should highlight that ECB officials have been
savings to ride and fuel new bubbles, and hindering
louder in asking for complementary fiscal policy
new investment and actual demand that could
measures, a field of action that is reserved to national
stimulate investment. In other words, if excess
governments. The fiscal policy stance in the EZ is
liquidity does not flow to households and non-
also posed to be a risk factor in the following
financial corporations, growth and prices may not
months. If the QE is not accompanied by higher
pick-up. If this scenario materialises, long-term
aggregate demand, the negative effects of the QE
economic prospects for Europe may be rather
alone, or at least its ineffectiveness, could prove
pessimistic: a period of persistent low inflation,
to be real.
weak
Another downside effect can be a drying-up bond

market liquidity, with a negative impact on
volatility, as it might be illustrated by the recent
economy
economic
investments
growth,
towards
low
the
corporate
profitability, and high unemployment rate. In

particular, member states under strong adjustment
processes will face additional difficulties to recover.
abnormal fluctuation of German bond yields.
The first, although still scarce macroeconomic
Furthermore, with the proliferation of negative
indicators for 2015 show that growth prospects are
sovereign yields in the EZ, yield seeking investors
positive; the road to deflation seems to have been
can increase exposure to less safe bonds. This can
stopped and some signs of successful transmission
prove beneficial to the Portuguese sovereign market
have been recorded, with increases in consumption
but even the attractiveness of Portuguese bonds
and production. But the latest (April 2015) PMI
could be significantly reduced as their yields come
indicators, both for the services and industry sectors
close to or go below zero. Although not a near-term
hint at an alignment in the major EZ economies, one
risk, this could jeopardise the countrys ability to raise
that reveals that the economy could no longer be
additional capital in the market.
accelerating in the beginning of 2015Q2. This is
The reasoning for these adverse effects of the QE

could stem from the initial proneness for new
bubbles:
the
low
effectiveness
of
policy
transmission could end up leading to increasing

risks of bubble formation in the securities and
real estate markets. It could even lead to the
reinforcement
of
deflationary
forces
via
artificially deflecting capital from lower yield
certainly a subject worth following closely in the

upcoming months. If the GDP growth rate does not
pick up more or less evenly in the EZ, and in a
lasting way, in this environment of very low
interest rates, several latent risks in the banking,
insurance and investment management sectors
could materialise.
In general, equity markets have responded positively
to expansionary monetary policies, but the effect can
and in the EU as a whole is bound to reappear in
be distortive. European and American stock markets
the agenda, upon the conclusion of the election
have reached historic highs, although not without
of
higher volatility. This raises the question as whether
institutional reform to be implemented, will come
there are signs of equity market overvaluation. The
amidst an increase in external (G20 and IMF) and
empirical evidence in the US and in the UK (which
internal (France and Italy) pressure to revise both the
have undergone QE programmes in recent years)
national budgetary targets and the role of public
warns not to ignore the hypothesis of potential risk
investment in the not so indebted European
for several markets and, eventually, for financial
countries, as well as the role of fiscal policy
stability. Although economic growth has been more
altogether.
noticeable, especially in the US, securities markets
increasingly vocal player in asking (though
have been hitting historical records, which do
asymmetrically,
not seem to be completely aligned with economic
reinforced intervention on fiscal policy, to help
fundamentals. In the UK, securities markets have
boost aggregate demand, which, by now, the
been close to exuberant and there are indications of
ECB recognises as being a hindrance on
potential over-heating in the real estate market
European economic prospects in the near and
(especially in the London region and high-end
medium run. However, the enduring uncertainty
dwellings),
regarding the outcome of the political debate
also
while
global
inflation
keeps
subsiding.
policy instrument to deal with low inflation, low

growth and still ill-solved consequences of the
financial crisis, ultimately put additional aches in
already
new
The
European
ECB
Commission.
has
also
country-wise)
for
The
been
an
clear,
between Greece and its EZ partners on the unsolved
Could the QE in Europe, especially as the single
the
the
worrisome
problem of a depressed Greek economy and its debt

obligations has prevented further advances in the
medium- to long-term discussion on institutional
reforms.
search-for-yield
As regards the reduction of borrowing costs, Member
behaviour? Will the European Commission's Junker
States are still facing several obstacles in credit
plan, intended to stimulate private investment,
access, and this problem is expected to remain in the
provide the balance required to shift investment
agenda. Sovereign spreads are still higher than
towards the real economy?
before the crisis. As a result, financial market
In conclusion, the challenges of the ECB and

European leaders are twofold: to preserve
fragmentation
persists
and
increasing
divergences in the EZ can create a negative
financial stability and avoid the so-called secular
snowball effect in distressed economies. Besides
stagnation in the Eurozone.
the
macroeconomic
impact
(fiscal
revenues,
competitiveness, investment), financial markets

The discussion of institutional reform in the EZ
can suffer from a potential liquidity squeeze.
recognises the importance of these activities and,
For Portugal, IMF voices concerns about the high

level of sovereign and private debt. Albeit in an
expected downward trend, household and nonfinancial corporate gross debt will remain higher than
in other advanced economies at least until 2020,
according to the IMF. Furthermore, high credit level
constitutes a barrier to the proper functioning of the
bank-lending
channel.
This
also
raises
the
question as to what extent can the Portuguese

economy benefit from ECBs expansionary
together with the G-20, is committed to developing

proper mechanisms to increase data accuracy,
improve transparency, and promote more efficiency
in the identification and mitigation of risks and
vulnerabilities in market-based financing activities.
The European Commission has recently presented
legislative proposals on Money Market Funds and on
the reporting and transparency of securities financing
transactions.
Imposing
access
to
more
comprehensive information, upholding thorough

surveillance and better, more harmonised regulation
policy.
can promote confidence and upgrade market-based

In addition, and considering the capital requirements
introduced by Basel III, banks are encouraged to
financing from a looming risk to an important

instrument for economic efficiency.
improve the quality of their assets and compelled to

act as buffers to cushion pro-cyclical or systemic
risks. In order to strengthen their capital structure,
banks may need to raise additional capital, stressing
the importance of capital markets and the need to
reinforce the interdependence between international
financial
institutions.
Competent
supervision
authorities from different jurisdictions are urged to

work
in
closer
cooperation
and
establish
comprehensive framework to avoid regulatory

arbitrage, as well as to detect and curb systemic
In addition, the European Commission has put

forward a plan to build a Capital Markets Union. Even
though it is proposed to strengthen the internal
market for financial services, diversify sources of
funding and mitigate the banking crisis effects on
taxpayers, in its current version, it is strikingly
omissive (for instance, it fails to address fiscal
terms),
which
and is identified by the IMF and the ECB as an

increasing risk to financial stability. Market-based
financial intermediation comprises a large spectrum
of activities and a broad variety of products (some
highly opaque and complex), which are difficult to
address.
enthusiasm
regarding its effectiveness. There have been recent

and ongoing regulatory changes within the European
Portuguese
Moreover, market based financing is on the rise
and
moderate
Community and, as a consequence, also in the
risks in useful time.
identify
advises
The
European
Union
regulatory
framework.
developments
aim
at
achieving
harmonisation,
less
information
Such
further
asymmetry,
increasing overall transparency, facilitating market

access to new non-institutional investors and
issuers, bolstering security and market trust and
allowing
for
more
comprehensive
market
supervision, with a wider scope of intervention and

instruments for supervisors to deploy. Looking
ahead, there are bound to be effects involving asset
management (via the Alternative Investment Fund
Managers Directive - AIFMD), securities markets (via
the Markets in Financial Instruments Directive II
MiFiD II and the Financial Market Regulation IFMR),
market infrastructures and derivatives (via the
European Market Infrastructure Regulation EMIR),
market abuse (via Directive 2014/57/EU and EU
Regulation
569/2014),
transparency
(via
EU
Directive 2013/50/EU) and the operation of Central

Securities Depositories (via the Regulation on
Settlement and Central Securities Depositories).
For the time being, these are some of the currently
predictable future focal points, many derived from the
recent past, that could pose challenges and lead to
significant shifts in the status quo, with potential
impacts for Portugal, the Eurozone and also on the
global economy and global markets.
5. List of Graphs
Graph 1 GDP growth (yoy) and forecasts for selected countries ................................................................... 10
Graph 2 Portuguese exports () of goods by destination - 2014 ................................................................... 10
Graph 3 Differences in the latest consecutive GDP forecasts for selected Countries ................................... 14
Graph 4 GDP at market prices (2005=100) .................................................................................................... 14
Graph 5 Government Consolidated Gross Debt as a Percentage of GDP ..................................................... 14
Graph 6 Per Capita GDP at market prices () ................................................................................................. 14
Graph 7 Overdue loans - Portugal (in % of total credit granted) ..................................................................... 15
Graph 8 Difference in the breakdown of the % of non-financial corporations with overdue loans .................. 15
Graph 9 Gross total doubtful and non-performing loans in the balance sheets of domestic banking groups
and stand-alone banks (% of total debt instruments and total loans and advances) ........................................ 16
Graph 10 New loans, respective interest ......................................................................................................... 16
Graph 11 Net issuance of debt securities Short- vs Long-term - Portugal ................................................... 17
Graph 12 Outstanding amounts of debt securities issued by NFC - Portugal ................................................. 17
Graph 13 Net issuance of debt securities by NFCs - Portugal ........................................................................ 17
Graph 14 Net issuance of long-term debt securities by NFCs - Portugal ....................................................... 17
Graph 15 Change in credit extended to households in Portugal and the Eurozone (mortgage and consumer
credit) - %........................................................................................................................................................... 18
Graph 18 Velocity of Money in the Eurozone ................................................................................................. 22
Graph 19 Spread between Euribor 12 Months and Harmonised Index Consumer Prices (HICP) - Portugal
and Germany (percentage points) .................................................................................................................... 22
Graph 20 HICP Selected countries and Eurozone (percent change) .......................................................... 22
Graph 21 Number of Houses Sold .................................................................................................................. 22
Graph 22 House Price Index (yoy) - % ............................................................................................................ 23
Graph 23 Housing Banking Appraisal Values by Region and Total (euros/m2) ............................................. 23
Graph 24 Spread between Portuguese 10-year sovereign bond yields and 12-Month Euribor (percentage
points) ................................................................................................................................................................ 24
Graph 25Nominal Bond Yields (10-year government bond yield) Percentage Points ................................. 25
Graph 26 Spread Towards German 10-Year Bond Yields in Nominal Terms Percentage Points ............ 25
Graph 27Real Bond Yields (10-year government bond yields minus HICP inflation rate) Percentage
Points ................................................................................................................................................................. 25
Graph 28 Spread Towards German 10-Year Bond Yields in Real Terms Percentage Points .................. 25
Graph 29 Commodities (Price indices in USD; 100 = Jan2009) .................................................................... 27
Graph 30 Co-movement of Sovereign and Private Debt Yields, Stocks, Forex and Commodity Indexes ..... 27
Graph 31 - Correlation between Equity and Commodities ................................................................................ 28
Graph 32 Stock Market Indices ...................................................................................................................... 29
Graph 33 Equity Realised Volatility ................................................................................................................. 29
Graph 34 Difference between the stock market earning yield and the 10-year Treasury bond yield ............. 30
Graph 35 Value-at-Risk, selected indices ....................................................................................................... 31
Graph 36 Positive and Negative Sentiment (weekly data) and Economic Sentiment Indicator ..................... 31
Graph 37- CAPE S&P 500.............................................................................................................................. 32
Graph 38 PSI20 CAPE and Earnings ........................................................................................................... 32
Graph 39- CAPE MSCI EMU .......................................................................................................................... 32
Graph 40 Price to Book Ratio - Banks............................................................................................................. 32
Graph 41 Present Net Value of Growth Opportunities .................................................................................... 33
Graph PSI20 monthly average dividend yield ................................................................................................ 33
Graph 43 Average implied risk premium - Portuguese Markets...................................................................... 34
Graph 44 CISS for Portugal, contributions coming from each of the sub-indices and the overall contribution
from cross-correlations (weekly) ........................................................................................................................ 35
Graph 45- 10-Year Sovereign Debt Yields ........................................................................................................ 37
Graph 46- 10-Year Sovereign Debt Yields - Other Countries ........................................................................... 37

Graph 47- Spread between 10-year and 2-year Sovereign bond yields ........................................................... 37
Graph 48- Portuguese sovereign debt yield curve ............................................................................................ 37
Graph 49- Spreads vis-a-vis Germany .............................................................................................................. 39
Graph 50- High yield bond issuance ( Billion) ................................................................................................. 39
Graph 51 Investment management in Portugal ( Billion) ............................................................................... 41
Graph 52 Collective investment in Portugal by fund type and private equity investment ( Billion) ............... 41
Graph 53 CIS in TS by fund type ( Millions) .................................................................................................. 42
Graph 54 Net Inflows by Investment Instrument (subscriptions minus redemptions) - Million..................... 42
Graph 55 Investment management in Portugal by fund class ( Billion) ........................................................ 42
Graph 56 Variation of Net Asset Value by Investment Instrument - Million ................................................. 42
Graph 57 Principal Components of Mutual Fund Flows - Portugal ................................................................. 43
Graph 58- Lit venue market share (Portugal and Europe) ................................................................................ 45
Graph 59- Lit venue market share (Portugal and the World) ............................................................................ 45
Graph 60- Market share of trading venues for PSI20 constituents ................................................................... 46
Graph 62 - Short-selling as % of Market Capitalisation Euronext Lisbon ...................................................... 47

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RESEARCH DEPARTMENT

SECURITIES MARKETS INDICATORS

Equities & Equity Futures selected indicators

Bonds & Credit Derivatives

LOOKING AHEAD AND CONCLUDING REMARKS

comprehensive policy approach to the economy,

repeating behaviours that led to the last financial

By early May 2015, the economic recovery of the

In early 2015, the ECBs assessment of the

monetary measures in January 2015 (to be deployed

management, a flight-to-safety was noticed, with

members advocating a wait and see option. The

more investors turning to treasuries and sovereign

ECB finally promised to arrange a 60 billion per

month quantitative easing plan for the next

The latest figures from the US GDP, along with the

of 2015, with at least a seven-year record high,

very latest PMI indexes from Markit (April 2015) for

when considering the 300 largest European

Europe, reveal an unexpected underperformance,

companies. Sovereign debt yields fell to nominal

hinting that the probable higher GDP growth rate in

all-time lows in a number of European countries.

2015Q1 may not be followed by a similarly strong

3 | Research Department | RISK OUTLOOK | June 2015

The still recent market turmoil shows the frailty level

geopolitical instability have taken a toll in some of the

among NFC and following an apparently stable rule

most recent and important buyers, leading to a steep

of thumb: the larger the loan, the higher the number

fall in Portuguese exports to several countries. A

of non-performing contracts. Taking a closer look at

trend that the Portuguese economy, at least for the

private corporations by size of workforce and non-

time being, has not managed to counterbalance by

gaining enough market share elsewhere. One of the

medium-sized enterprises (SME) are now clearly

key questions for 2015 is whether exports will

below the respective indebtedness level of late

regain momentum, as the European Commission

2007. According to recent analyses by Banco de

predicts in its spring 2015 economic forecasts.

Portugal, most of the deleveraging among private

For Portuguese CEOs, the lack of demand

corporations occurred in the context of debt

(particularly in the real estate and construction

market for 2015.

although with high volatility. Thus, the higher

Commission also reveals that, in 2014, the stock of

indebtedness, mainly among large corporations and

advantage of the low oil price/low euro combination.

been ongoing for more than four years now and

(NFC) and for households, kept beating previous

4 | Research Department | RISK OUTLOOK | June 2015

The real estate market is one of the focal points for

risk transmission across multiple sectors. The high

monetary policy instruments intended to fight

real estate market illiquidity, combined with non-

deflation risks could turn out to be themselves a