Strategic Opportunities in Portuguese Markets Amid Revised Growth Forecasts

Portugal's economy has entered a period of heightened uncertainty, with the Bank of Portugal slashing its 2025 GDP growth forecast to 1.6%—a steep drop from its March projection of 2.3%—as global trade tensions and U.S. tariffs weigh on export performance. Yet, beneath the gloom lies a compelling case for contrarian investors: a landscape of undervalued equities, resilient sectors, and high-yield fixed-income opportunities, all underpinned by long-term structural tailwinds. For those willing to look past near-term volatility, Portugal's markets may offer a rare chance to buy low.

The Downward Revision: Cause and Consequence

The central bank's revised outlook reflects a perfect storm of external headwinds. First-quarter GDP contracted by 0.5% as exports fell 3.2% year-on-year, while imports surged amid fears of impending tariffs. The U.S. levies on Portuguese steel, automobiles, and consumer goods have exacerbated trade deficits, with the current account deficit widening to 2.1% of GDP in early 2025—its highest level in five years. These pressures are expected to persist, with the OECD warning that global trade volumes could remain subdued through 2026.

Yet, the Bank of Portugal's projections also highlight resilience. Domestic demand—bolstered by a robust labor market (unemployment near 6.4%) and public investment—is expected to offset external drag. Fiscal discipline remains intact: the budget deficit is projected to stay at 0.1% of GDP in 2025, a testament to austerity measures enacted during the debt crisis. Crucially, EU Recovery and Resilience Plan (RRP) funding, which will disburse €14 billion through 2026, continues to support infrastructure and green energy projects, even as the RRP's sunset in 2027 poses a longer-term risk.

Equity Markets: Seeking Value in Resilient Sectors

Portuguese equities have underperformed in 2025, with the PSI-20 index down 8% year-to-date as of June 2025. Yet, this decline masks pockets of opportunity.

1. Export-Sensitive Sectors with Diversified Exposure
While traditional exports like textiles and automotive components face tariff headwinds, companies with global supply chains or niche, high-value products may weather the storm. For instance, Sonae MC (SONAE), a logistics and retail conglomerate, has diversified into e-commerce and renewable energy infrastructure—sectors less exposed to trade barriers. Its stock, down 15% YTD, now trades at 12x forward earnings, below its five-year average of 14x.

2. Infrastructure and Renewables
The RRP's €14 billion pipeline is funding projects in transportation, digital infrastructure, and green energy. Companies like Energias de Portugal (EDP) (EDP), a renewable energy leader, stand to benefit as Portugal aims to achieve 80% renewable electricity by 2030. EDP's valuation—trading at 10x forward earnings—reflects investor pessimism about near-term demand, yet its long-term growth trajectory aligns with EU targets.

3. Domestic Consumer Staples
Portugal's consumer sector, shielded from trade wars, offers stability. Sonae SGPS (SONAE), which operates discount retailer Continente, has seen steady sales growth amid inflationary pressures. Its dividend yield of 4.5% and P/E of 9.5x suggest it's priced for a recession that may not materialize.

Fixed Income: High-Yield Bonds as a Contrarian Play

Portuguese government bonds have rallied this year, with the 10-year yield falling to 2.8%—near its lowest since 2020—as investors seek safety in its improved fiscal health. However, the real opportunity lies in corporate high-yield bonds, particularly those issued by firms benefiting from EU funding or resilient cash flows.

Why High-Yield?
- Fiscal Prudence: Portugal's debt-to-GDP ratio is projected to stabilize at 86% in 2025, down from 120% in 2014. This reduces default risk for issuers.
- Yield Advantage: Portuguese corporate high-yield bonds offer spreads of 350-400 basis points over government bonds—well above historical averages—compensating investors for trade-related risks.
- EU Fund Flows: Firms tied to RRP projects (e.g., Galp Energy's renewable ventures) may see bond ratings upgraded as projects gain traction.

Risks and Timing Considerations

The primary risks are clear: a prolonged trade war, a sharper-than-expected contraction in 2025 GDP, or a sudden shift in EU funding priorities. Investors should avoid overexposure to export-heavy sectors like textiles and automotive parts.

Timing is critical. The current sell-off, driven by trade fears, may already have priced in much of the bad news. With inflation cooling to 1.9% in 2025 and the central bank's dovish stance, conditions favor a rebound in late 2025 or early 2026.

Conclusion: A Contrarian's Blueprint

Portugal's revised growth outlook is a reminder that markets often overreact to near-term risks. The combination of EU-funded structural reforms, fiscal discipline, and resilient domestic demand creates a foundation for recovery. For equity investors, a selective approach to infrastructure, renewables, and domestically oriented firms can capitalize on undervalued stocks. In fixed income, high-yield bonds offer a yield pickup with manageable risks.

The path forward is bumpy, but for investors with a 3-5 year horizon, Portugal's markets may prove a rewarding contrarian bet.