NEW YORK (TheStreet) -- A possible sign of the slow return to normal is underway in the European Union in 2013 could be the surprising performance of the equity markets in the PIGS countries. PIGS was the derogatory acronym given to Portugal, Italy, Greece and Spain during the financial crisis and still sticks with them as they work through various political and fiscal obstacles on the way to recovery.
Portugal's PSI 20 Index is up 16% for the year to date. Last week Global X launched the FTSE Portugal 20 ETF (PGAL), which is the only fund in the U.S. market offering exposure.
Five years ago Northern Trust offered a Portugal ETF through its NETS product line of single-country funds -- it was subsequently shut down after just a few months of trading. That Northern Trust fund and the new Global X fund both track similar indexes, with each having 20 holdings.
But there has been a lot of change in the makeup of the index since the financial crisis.
In 2008 the financial sector was the largest in the index at 26% compared to just 15% now. Utilities is the largest sector in PGAL with a 20% weighting followed by consumer services at 23%. Financials and energy at 14%.
Now, as then, the largest holding in the fund is Energias de Portugal (EDPFY), which currently has a 20% weighting in the fund. The top three holdings account for 47% of the fund.
That heavy of concentration is not ideal in terms of constructing an index fund but many smaller markets have smaller indexes and smaller indexes are frequently dominated by just a few companies. The iShares MSCI Denmark Capped ETF (EDEN) has a 20% weighting in Novo Nordisk (NVO) as another example of this type of concentration.
While these funds are exposed to single-stock risk, they obviously pose less single-stock risk than buying an individual stock.
Before investing in a country fund it is obviously important to understand the fundamental story of that country. The list of fundamental reasons to avoid Portugal is very long. The unemployment rate is still in the mid-teens, its ratio of debt to GDP is 124% and after a long run of GDP contracting it increased by a microscopic 0.20% in the third quarter of 2013. The country is still under bailout protection, having just received its latest disbursement of $6 billion from the European Financial Stability Facility.
In thinking about the positives for the country, the first point to make would have been that Portugal is due to emerge from its bailout protection in June. But the Financial Times is reporting that concern is growing the credit line available from the European Union as a safety net after the bailout ends may not be large enough.
The concerns stems from budget dysfunction and large bond payments coming due in the next couple of years while interest rates for future borrowing remains high; 10-year debt yields about 5.8%. Part of the equation is Ireland's recent decision to say no to the above-mentioned line of credit as it emerges from its bailout. This is not an option for Portugal and is acting as an anchor in Portugal's attempt to return to normal economic function.
It is the nature of equity markets that they are leading indicators of the economy and they tend to go up or down before GDP does. This year's gain for Portugal's benchmark index could be an advance warning of a recovery about to ensue, even if that is difficult to see from here. PGAL will clearly be the easiest way to play the recovery whenever it finally comes.
One further catalyst to boost sentiment, although extremely anecdotal: Cristiano Ronaldo scored three goals in a victory over Sweden last week to send Portugal to the 2014 World Cup.
At the time of publication the author had no position in any of the stocks mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.