Portugal: What, Me Worry?

I know the headline on this blog is beyond brave—especially for a CIO. I wanted to grab your attention, and it worked.

I’m paid to worry. In fact, at the moment I’m worried about things like potential U.S. wage inflation. I’m worried about premature Fed tightening. I’m worried about a slowdown in the emerging markets. At these valuation levels, there is plenty to worry about.

What I am explicitly not worried about is Banco Espirito Santo, SA or its parent conglomerate holding company, Espirito Santo International, SA. The holding company’s trouble rolling over its debt has caused fears of contagion to rear their ugly heads anew. As a result, the equity markets are heading for the hills.

For starters, I’m not worried because the problems are at the parent holding company, and not the bank. While the bank may not be pristine, regulators certainly have the means to control the situation at this particular institution. Even more importantly, regulators have the tools to squash the perceived threat to other financial institutions, should these threats materialize. If we learned anything in 2008–09 in the U.S., and 2011–12 in Europe, it’s that regulators have a range of ways to contain damage at the bank and banking system level, if they want to. It’s a question of will, rather than ability. In that regard, both Bank of Portugal and the European Central Bank are fully engaged. In this particular situation, I believe the credit markets have it right: They have had only minimal widening, especially in the contagion-prone European periphery.

So, the reactions in the equity markets, it seems to me, are driven more by concern over valuations, earnings and potential Fed interest rate policy rather than any shenanigans at Banco Espirito Santo or Espirito Santo International. There’s a lot to worry about in the world, for sure, but an obscure Portuguese financial institution does not top the list. With an improving global macro backdrop, still-benign inflation, and a Federal Reserve that will likely protract its accommodative stance, equities are still well positioned to outperform most other asset classes.



Fixed income investing entails credit and interest rate risks. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and geopolitical risks.

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