Spain too risky? Buy Portuguese stocks, Invest Iberia says

(Bloomberg) As political tensions rage in Spain, an economic boom in its Iberian neighbour is attracting investors to Portuguese equities.

Stocks in Portugal are glowing as ratings agencies take an increasingly positive view of the smaller nation, with S&P Global Ratings shedding its junk-bond status for Portugal for the first time in more than five years on September 15. 

Catalonia’s push for independence has hit sentiment in Spain, paring gains on the benchmark IBEX 35 Index this year to 9.4%, while Portugal’s PSI20 Index has climbed 16%, making it the sixth-biggest gainer among developed European gauges tracked by Bloomberg.

"If you look around, Portuguese stocks offer a very strong investment case," says Invest Iberia fund manager Paulo Monteiro, who’s been cutting back on his investments in Spanish stocks and increasing his holdings in Portugal. "Many small Portuguese listed companies that were under the radar are now being discovered by investors who see an opportunity in investing in the country," Monteiro said in an interview.

Monteiro’s seven million-euro fund has beaten 85% of peers this year.

Monteiro is betting Portugal’s economic recovery, powered by exports and a surge in tourism, will continue to bolster shares in companies including casino operator Estoril Sol SGPS SA, which has risen four-fold since the start of the year. Other stock bets include paper producer The Navigator Company, up 36%, and lender Banco Comercial Portugues SA, which has climbed 34%.

SDC Investimentos SGPS SA, a holding company involved in real estate and construction projects, is the standout performer on Lisbon’s PSI All-Share Index, comprising all the stocks listed on the main market. The stock has more than tripled since late September, a rally that drew the attention of the Portuguese securities regulator. The company said Oct. 3 that it had "no relevant information" that could affect the shares.

Soccer club Sport Lisboa e Benfica, with a market capitalisation of just 37 million euros, has gained 63% this year.

The Bank of Portugal forecasts that economic growth will accelerate to 2.5% in 2017, the fastest rate in a decade and faster than estimates for the wider euro area. While the country’s debt is still rated below investment grade by Fitch Ratings and Moody’s Investors Service, both ratings agencies have a positive outlook on the nation.

"Portugal’s credit rating upgrade and a stronger economy has been boosting shares in a range of sectors in the country," said Banco BPI SA trader Marta Brito e Cunha. "The stock market in Portugal may also be benefiting from a stable political environment at a time when political tensions are rising in Spain."