Hard times ahead for investment managers in wake of Portugal bail-out

The forecast for Lisbon’s finances looks bleak, with fund managers expecting investment in funds to remain weak until recovery after the EU-IMF rescue.

It will take three years for fund management sales in Portugal to recover from the financial crisis, says Gonçalo Gomes, product manager at ActivoBank, a retail and investment services bank owned by leading Portuguese group Millennium BCP.

Gomes says the recently agreed European Union and International Monetary Fund (IMF) three-year rescue package for Portugal will help to bring the economy back to health and revitalise business.

“If we are reasonably optimistic, the economy will get back on track after those three years,” he says with some caution.

ActivoBank offers clients investments in about 1,000 funds from 27 fund providers. At the end of 2010, it ranked third with a 14.6% market share of the retail funds business in Portugal, behind Millennium BCP with 15.4%, and Banco Best (part of the Espirito Santo Group) with 29.3% – all according to data from market regulator CMVM.

Investment in funds is unlikely to return any time soon to the bull market levels seen in 2006 and 2007. The rescue plan described by financial officials as “tough but fair” is expected to cause a recession for the initial two years before the economy returns to growth in the first half of 2013.

After Portugal’s general election, scheduled for 5 June, a new government will have to implement the reforms and spending cuts to bring the budget deficit down to 3% of gross domestic products by 2013.

Gomes says: “We will have to change a lot of things – labour market laws, the justice system – besides increasing taxes and lowering wages.

A lot of structural changes will have to happen.” He believes the reforms will stick as Portugal will be under constant vigilance and pressure from the EU and the IMF to meet targets.

Portuguese investors already buffeted by the crisis are worried about the rescue plan’s impact.

Asset managers have had to contend with fierce competition for clients, rising interest rates and banks being virtually cut off from international credit markets with the European Central Bank (ECB) as the main source of external funding.

There have been fears of a run on banks and capital flight, though there is no evidence of this, Gomes says.

“Clients are very concerned about the safety of their money.”

High interest rates have reduced the incentive to take risks and investing in funds and deposits are seen as safer.

“It’s been a terrible year for us in terms of funds. The sentiment has been very negative,” says Gomes. With Portuguese banks unable to raise funds in wholesale markets, margins have been squeezed as they fought for retail deposits, putting a further strain on their capital positions.

This pressure should ease once Portuguese banks can tap
international credit markets again following the EU-IMF rescue.

Investment could even start picking up next year as most measures will be implemented this year and early in 2012, Gomes says.

“Normally, people start to invest before the economy bottoms out. This is likely to be in 2012, with some initial pick-up in confidence. People will see some light at the end of the tunnel some time next year.”

Portugal should also avoid the experience of Greece, which saw a big drop in GDP following a similar rescue.

“That probably won’t happen in Portugal,” Gomes predicts. “The measures are not as drastic.”


New EU rules for Ucits may help when setting up new funds. The regulatory approval process in Portugal can be lengthy. “It takes a long time to have a new fund available. In some cases, it takes more than a year,” Gomes says.

Much will depend on the speed and scale of the Portuguese recovery, giving people confidence to invest again in funds. Until then, the business environment will remain challenging.

“Right now, we are almost selling only deposits,” Gomes says. “It will take a while for sales levels [for funds] to get back to the levels in 2006 or 2007.”

Institutions have had to adapt. The bank is in discussions with potential additional partners to have new funds available for its clients once the recovery takes hold.

Gomes says: “We are mainly concerned with funds that are appropriate for retail clients, including asset allocation funds; funds of funds; global funds; global equity funds; global fixed income funds. We select funds to be included in our list of recommended funds. Our objective is to develop a diversified offering for retail clients.”


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