* Portugal, Greece shares and debt Europe's winners in 2014
* Inflows into funds invested there accelerate - Lipper
* Investors bet on recovery as both economies bottom out
* Benefiting from emerging market jitters, low returns
By Francesco Canepa and Marius Zaharia
LONDON, March 24 Yield-hungry investors are
flocking back to Greek and Portuguese markets, shunned by
international buyers for four years, as the outlook for the
bailed-out countries improves and alternatives look more
expensive or increasingly risky.
Portuguese and Greek shares and bonds have been the best
performers in Europe in 2014, and funds invested in them are
making a killing, Thomson Reuters data shows.
Investors say they are driven by economic improvement, which
provides fresh impetus to an initial bounce triggered by the
European Central Bank's pledge in 2012 to save the euro.
Potential investment alternatives are also less tempting.
Tensions between the West and Russia and global growth concerns
cloud the outlook for similar-yielding emerging markets, while a
1-1/2 year rally has shrunk returns elsewhere in euro zone debt.
"It's not so much an interest-rate-driven rally but much
more a structural shift and a perception that the euro crisis is
behind us," said Franz Wenzel, chief strategist at AXA
Investment Managers, which manages assets worth about 550
billion euros ($760 billion).
After nearly crashing out of the euro zone in 2012, Greece's
recession is easing, while the Portuguese economy is already
rebounding. Lisbon is due to exit its international bailout in
about two months.
Greece's ATG and Portugal PSI 20 stock indexes
have been the best performers in Europe so far this year, having
risen about 14 percent. The STOXX Europe 600 index is
close to where it began the year.
Greek and Portuguese 10-year bond yields have fallen roughly
150 bps this year to roughly 7 percent and 4.4 percent, compared
with 50-90 bps falls in fellow peripheral states Spain, Ireland
and Portugal, whose bonds yield 3-3.5 percent.
While the small size of the Greek and Portuguese markets
discourage some investors, it also means that a relatively
modest inflow of money into those countries has a large price
Funds invested in Portuguese shares, for example, took in a
net 30 million euros in January, nearly as much as in the whole
of 2013, after steady outflows over the previous three years,
Thomson Reuters Lipper data showed.
Their asset under management, however, were still a meagre
381 million euros, or a quarter of what they were in 2007. The
picture is similar in Greek stock funds.
Even after their recent rebounds, Greek and Portuguese
shares trade at steep discounts to their European peers, based
on the value of their assets, Datastream data showed. This
compares with hefty premiums before the crisis.
Junk-rated Greek bonds still offer higher yields than those
for the rest of the euro zone and emerging countries such as
Romania and Hungary. Portugal's yield is comparable to Poland's.
Data from Markit, based on contributions from about 20,000
institutional investors with about $15 trillion under
management, the ratio of long to short positions in Spanish,
Italian and Irish bonds is already high on the expectation of
falling bond yields, suggesting little room for a further rally.
The ratio on Spanish bonds shows investors almost as bullish
as they have been in five years.
Research by Citi based on data from its network of
salespeople shows that European asset managers were long or very
long in Italy and Spain, while in Portugal, Ireland and Greece
the same investors were only slightly long or neutral.
Japanese investors were still short or very short all
peripheral markets, while hedge funds were longer in the
lower-rated periphery than in Italy and Spain.
"Positioning is very aggressive ... in Italy and Spain,"
said Philip Tyson, a strategist at ICAP. "Portugal, that's where
the juice will be, particularly as yields in Spain and Italy are
very, very low right now."
EMERGING MARKET FILLIP
While Greece and Portugal still have enormous debts, the
progress they have made so far makes them a more attractive
investment than many emerging markets, investors said.
Emerging economies are facing an uncertain future as the
Ukraine crisis casts a shadow on eastern Europe, China's economy
slows and the Federal Reserve curbs its easy money policy,
triggering outflows from countries with weaker currencies.
This trend was seen as especially beneficial for Greece,
which was reclassified by index operator MSCI as an emerging
market last year and is set for a windfall as EM-focused fund
managers cut their positions in countries such as Brazil,
Russia, India and China, known collectively as the BRICs.
A Lipper basket of funds invested in BRIC equities suffered
net outflows of 249 million euros in January, while Greek
equities lured 22 million euros.
"If you go down the list of MSCI Emerging countries, a lot
of them have their issues," said William De Vijlder, vice
chairman of BNP Paribas Investment Partners.
"Then you have a country (Greece) that now has turned a
corner and that makes it appealing for investors."
Since the start of the year, a FTSE exchange-traded fund
(ETF) invested in Greek blue-chip stocks attracted net inflows
equal to over a third of its current total assets under
management, Markit data showed.
($1 = 0.7255 Euros)
(Graphics by Vincent Flasseur and Francesco Canepa; Editing by