Political Gridlock in Portugal: A Catalyst for Equity Volatility

The Portuguese general election on May 18, 2025, delivered a fractured parliament, with the center-right Democratic Alliance (AD) narrowly securing 81 seats—the largest share but far from the 116 needed for a governing majority. Meanwhile, the far-right Chega party surged to 54 seats, marking its rise as the second-largest force in a parliament now defined by deepening instability. For equity markets, this outcome spells short-term volatility as coalition negotiations falter, deterring foreign capital and pressuring sectors like real estate and banking. Investors should brace for turbulence—and consider tactical shorts or hedging strategies to capitalize on the uncertainty.

The Political Standoff: No Easy Path to Governance

The AD’s Prime Minister Luís Montenegro faces an impossible arithmetic: his narrow lead rules out a coalition with Chega, whose anti-immigration rhetoric and controversial policies make it politically toxic. The Socialist Party (PS), now reduced to 55 seats, has soured on Montenegro after his government collapsed in March over the Spinumviva scandal—a corruption case involving his family’s consultancy firm. With no partner willing to join a formal coalition, Montenegro’s only option is a minority government reliant on ad-hoc support from centrist splinter groups.

The stakes are high. Portugal’s parliament has been hung since 2023, and the AD’s last minority government survived just 14 months before collapsing. This time, the political environment is even more hostile. .

Why This Matters for Equity Markets

1. Real Estate: The Housing Crisis Escalates
Portugal’s real estate market is a powder keg. With housing costs up 9% in 2024 and average wages stagnant at €1,200/month, the sector faces a perfect storm of affordability crises and policy uncertainty. Chega’s rise has amplified calls for stricter rent controls and crackdowns on foreign buyers—a direct threat to developers and property REITs.

The AD, meanwhile, lacks the votes to push through meaningful reforms. . Investors in real estate firms like [Portuguese REIT ticker] or housing developers should prepare for regulatory headwinds and declining valuations as gridlock persists.

2. Banking: Policy Shifts Threaten Stability
Portugal’s banks are acutely sensitive to political shifts. The AD’s minority status means any fiscal or regulatory changes—such as tax reforms or capital controls—will require cross-party deals that are unlikely to materialize. Chega’s anti-immigration stance could also reduce labor inflows, worsening demographic challenges that strain public finances.

Banks like [Banco Santander Totta ticker] or [Millennium bcp ticker] face twin risks: a slowdown in mortgage lending due to housing affordability issues and increased non-performing loans if the economy stumbles. The MSCI Portugal Index’s banking sector has underperformed the broader market by 15% year-to-date—a trend poised to worsen.

Investment Strategy: Short the Index, Hedge with Options

The path forward is clear: short the MSCI Portugal Index (EPP) or its ETF counterpart. The index has already declined 8% since April 2025 on election jitters, and political gridlock will amplify this trend. For a tactical play, consider selling puts on EPP with a strike price 10% below current levels, capturing premium while betting on further declines.

Alternatively, use put options on sector-specific ETFs tied to real estate or banking. The AD’s inability to pass reforms will keep these sectors in a liquidity trap, while Chega’s influence could introduce regulatory shocks at any moment.

The Catalyst: Gridlock Breeds Capital Flight

Foreign investors have already begun fleeing. Portugal’s net foreign equity outflows hit €3.2 billion in Q1 2025, with capital fleeing to more stable markets like Spain or Germany. This exodus will accelerate as the AD’s minority government struggles to pass budgets or address systemic issues like the Spinumviva scandal.

The final trigger? A no-confidence vote. If Montenegro’s government collapses by late 2025—a distinct possibility given his razor-thin support—Portugal faces another snap election by early 2026. Until then, equities will remain hostage to political dysfunction.

Conclusion: Act Now Before the Sell-Off Deepens

Portugal’s political fragmentation is not a temporary glitch—it’s the new normal. With no party capable of unifying the parliament and Chega’s disruptive influence growing, the MSCI Portugal Index is primed for further declines. Investors who short the index now or hedge with options will position themselves to profit from the inevitable sell-off.

The message is clear: political gridlock equals market pain. Don’t wait—act before the next headline sends Portuguese equities reeling.