Portuguese equities have surged since last autumn, the main index, the PSI-20, gaining around a third since the end of October. Meanwhile, European equities touched record highs in June. That news might come as a surprise given that Portugal, the continent and the global economy have just undergone a massive economic contraction as a result of the COVID-19 pandemic. But it is not just Europe where investors have been scrambling to buy stocks. They have reached record highs in the US and other parts of the developed world.
Property prices are also surging across the globe. Here in the Algarve, prices are shooting up, and finding a good builder is akin to the search for the Holy Grail (more on the current state of the Algarve property market in next month’s column).
In the UK, the chief economist at the Bank of England, Andy Haldane, says the UK residential market is “on fire”, while house prices in the US are now growing at a double-digit space. The same story can be seen in Australia. In Sydney, for example, house prices are rising by a thousand Aussie dollars, or €640, a day and gathering speed.
Cheap money fuels demand
So, what is going on? Why are stock and residential property prices surging at a time when many economies remain in lockdown, unemployment is being contained by massive government spending programmes and nobody knows how many businesses could go under when that support is withdrawn?
Ultra-low interest rates, or the price of money, are a key influence. In the US, for example, you can get a 30-year mortgage at borrowing costs close to 50-year lows. In Portugal, non-residents can obtain loans of up to 80% of the value of a home at just 0.5% interest for up to 40 years.
The other side of the coin of low borrowing costs is that returns for savers are even lower. So, if leaving your money on deposit in a bank will generate barely any return, investors, particularly those seeking an income, will look for alternatives and that includes equities. Not only can equities go up in value, they also pay dividends, or a regular stream of income, to shareholders.
Many companies have cut their dividends as a result of the recession, but the income you can receive from investing in equities is still significantly higher than leaving your money on deposit. So even though equities can be volatile and there is a risk that they will fall in value, many investors seem to think the substantially higher income they offer provides adequate compensation for that risk.
The forward-looking nature of equities also explains the record highs reached in many markets. The stock price of a company today is based on expectations of how fast that company’s profits will grow in the future. Stock prices fell sharply early last year following the outbreak of the COVID-19 pandemic in the expectation that a deep economic slump would cause profits to plummet.
Portugal’s vaccination programme accelerates
This year, the opposite is happening, and equities are looking forward to a rapid economic revival that will boost profits’ growth dramatically, as the vaccine rollout gathers pace. So far, around 30% of European adults have received at least one dose of a COVID-19 vaccine, and 17% have been fully vaccinated. Around 36% of Portuguese have received one dose. That is still significantly below the rates seen in the US, where 42% of Americans are fully vaccinated, and the UK, where over half the population has now received both jabs. But the programme is at least gathering pace and progress is now much clearer than earlier this year, certainly in the case of Portugal.
As the Secretary of State for Health, Diogo Serras Lopes, recently told Lusa news agency: “It took more than two months to inoculate the first million vaccines, 33 days for the second, 19 days for the third. Now, we have reached four million in just 14 days.”
A tidal wave of hoarded cash is about to flow across economies
As economies unlock, they are likely to benefit from massive pent-up demand that will unleash a surge in spending. Consequently, economic growth forecasts for Portugal and the rest of Europe are being upgraded rapidly. Economy minister Pedro Siza Vieira recently told Reuters news agency that the economic recovery has been fast and strong since the COVID-19 lockdown started easing in mid-March, and growth this year may exceed the government’s forecast of 4%.
“Exports are growing, consumption and investment are reacting very significantly and jobs are being created,” according to the minister. The UK’s decision to take Portugal off its green list may also be less damaging than first appeared likely. Plenty of packed aircraft continue to fly into Portugal every day from the UK. Sun-starved Brits apparently do not share their government’s concerns about the state of the pandemic in Portugal.
Meanwhile, the eurozone’s economy, Portugal’s key trading partner, is expected to grow 4.3% this year and 4.4% next year, according to the most recent economic outlook from the OECD. Indeed, the eurozone economies are now on track to be back at their pre-pandemic levels around mid-2022, while the Portuguese economy will reach that landmark towards the end of 2022.
Moreover, although there are signs that inflation is taking off in some areas, fueled by that massive surge in demand as lockdown ends, interest rates are unlikely to rise further. That is because central banks such as the US Federal Reserve believe that any hike in inflation will prove temporary.
The prospect of continued low interest rates augurs well for both property and equities in Portugal and elsewhere. If you want to get that home in sun, it’s probably time to act now. It will almost certainly be more expensive later this year and next.
By Anthony Beachey
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Anthony Beachey is a former BBC World Service journalist now working on a freelance basis in Portugal, where he specialises in economics and finance.
