* Portugal's PSI20 giving up gains, up just 3 pct for 2014
* BES shares down more than 50 pct in 3 weeks
* Earnings growth forecasts for Portuguese companies stall
* Valuations stretched versus rest of Europe
By Atul Prakash and Vikram Subhedar
LONDON, July 1 Investors are becoming more
cautious about Portuguese stocks as growing concern over
Portugal's biggest bank darkens the earnings outlook for the
rest of the country's companies, leaving valuations looking
stretched and the market vulnerable to further selling.
Portugal's PSI-20, one of Europe's best-performing
markets over the first quarter, has seen gains fade as analyst
earnings downgrades mount and as worries around banks spreads to
The index has slumped about 14 percent from a near
three-year high in April, against a 2 percent gain recorded by
the STOXX Europe 600 index.
The slide is led by Portugal's largest listed bank, Banco
Espirito Santo (BES). Half its market value was wiped
out in the past three weeks, owing to financial troubles at its
parent company and possible losses at its Angolan unit.
Both Portugal's CMVM and London's FCA market watchdogs
imposed a short-selling ban on BES before markets opened on
Tuesday. Short selling essentially bets a stock will lose value
and, it can cause shares to fall faster.
Worries over BES has underscored the lingering issues around
the health of peripheral Europe's banks. It's also hurting other
Portuguese stocks, such as Portugal Telecom - which is
indirectly exposed to Espirito Santo - and is pushing up
Portuguese sovereign-bond yields.
"At some point, the problems at the banking sector will
impact the pace of recovery in parts of the periphery. It's a
warning signal that we shouldn't get overly positive about some
of these peripheral markets," said Peter Dixon, equity
strategist at Commerzbank.
The earnings outlook for Portuguese companies is suffering
as a result: Galp Energia, an energy firm, and
retailer Jeronimo Martins have seen cuts to their EPS
forecasts in recent weeks.
Today, Portugal has the weakest earnings-per-share growth
projections among developed European markets.
The 12-month forward EPS for Portuguese companies in the
STOXX Europe 600 index is down 4.2 percent in the past
three months, against a surge of 23 percent for Greece and a
drop of 1.8 percent for Spain.
"When you get earnings downgrades and negative investor
sentiment, you would expect to see an impact on consumer
confidence and the economy," said Philippe Gijsels, head of
research at BNP Paribas Fortis Global Markets in Brussels.
Gisjels said he prefers Spain and Italy and is advising
clients to remain cautious on Portugal.
At 19 times forward earnings, Portuguese stocks are among
the most expensive in Europe. The Stoxx 600 trades at
14 times earnings.
Portuguese stocks, key beneficiaries until last month of
investor interest in peripheral European markets, have given up
most of their gains for the year as it becomes clearer that
earnings will fail to justify lofty valuations.
"There will be some weaknesses from time to time and there
is a risk for investors in the banking sector," Lorne Baring,
managing director of B Capital Wealth Management, said.
(Reporting by Atul Prakash; Editing by Larry King)