CALDEIRÃO DE BOLSA

``But they won't change the fact that this is a small, peripheral market.''

Não é de admirar, isto também não passa de um small, peripheral country...

Lisbon, Feb. 13 (Bloomberg) -- When Joao Franco searches the Internet for investment opportunities, he doesn't bother to look at Portuguese shares anymore.

``I used to put my savings in the best known Portuguese stocks,'' such as Portugal Telecom SGPS SA, the country's largest phone company, Franco said. ``Now lots of stocks in Europe look much more attractive.''

Franco, 28, who helps manage an advertising company in Lisbon, isn't the only investor losing interest in Portuguese stocks. The number of shares traded fell last year to the lowest since 1997. The number of listed companies has fallen by a third in the last four years to 86, mostly because of takeovers.

The shrinking stock market may hurt the government's plans to raise about 600 million euros ($644 million) with the initial public offering this year of Galpenergia SGPS SA, the country's largest oil and gas company, investors said. Portugal is also selling this year a 15 percent stake in Portucel SA, the largest paper company, for about 135 million euros.

``The way things are going, we may have to broaden the scope of our Portuguese stock funds,'' to add European shares, said Pedro Melo e Castro, who manages about 10 million euros in Portuguese equities at Banif SGPS SA. ``Or we'll focus on even smaller companies.''

Trading in Portuguese stocks has fallen since the introduction of the common currency in 1999, which made it easier for Portuguese investors to buy stocks in countries sharing the euro without taking on currency risk.

The common currency has hurt other small markets, such as Greece and Belgium, as banks and assets managers replace country- specific funds with European funds. The average value of shares traded on the Athens Stock Exchange last year was 54.6 million euros a day, 83 percent lower than in 1999.

Worst Performing

The benchmark indexes of Portugal, Greece, The Netherlands and Belgium are also among the 10 worst-performing indexes in the world since the start of the euro.

``The advantages of bigger markets, with more companies to choose from, became even more obvious,'' with the euro, said Ana Claudino, an economist at Banco Bilbao Vizcaya Argentaria SA in Lisbon. ``Most Portuguese stocks are so little traded that they rise and fall for no obvious reason.''

An economic slump has added to the decline in Portuguese stock trading as company earnings decline. Growth was about 0.5 percent last year, down from 1.8 percent in 2001. Unemployment is at a six-year high.

Investors have had fewer stocks to choose from in the past three years because of takeovers of five of the 10 biggest banks in the country, including Banco Totta & Acores SA and Banco Mello SGPS SA.

Next to leave the exchange may be Vodafone Telecel- Comunicacoes Pessoais SA, the seventh most weighted stock on the PSI-20 Index. Parent company Vodafone Group Plc, the world's biggest cellular phone company, last week offered to buy the 39 percent it doesn't own in its Portuguese unit.

Telecel, Portugal's second-largest wireless carrier, accounted for more than 5 percent of trading on the exchange last year, or 1.2 billion euros. The company has a market value of 1.86 billion euros.

``It's one of the market's few star companies that's just gone,'' said Victor Barosa, who helps manage about 1.25 billion euros in assets at Barclays Bank Plc in Lisbon, including Telecel shares.

Next in line to replace Telecel on the benchmark index, which groups the country's 20 most traded stocks, is CIN-Corporacao Industrial do Norte SA. Portugal's biggest paint maker is valued at 145 million euros.

Nine Companies

Companies the size of CIN rarely attract international fund managers, who often prefer stocks that are easier to buy and sell.

``We don't look at companies with a market value of less than 1 billion euros,'' said Frederic Naef, who manages about 500 million euros at Advanced Investment Techniques SA in Geneva, and has no Portuguese stocks.

Only nine companies in the PSI-20 Index would qualify for Naef's funds. The combined market value of all the index's members is 36.4 billion euros, less than the value of Telefonica SA, Spain's biggest phone company.

``Portugal's problem is not just one of demand, but also of supply,'' Economy Minister Carlos Tavares said. ``The companies of European scale can be counted with the fingers of one hand.''

Other stocks may be removed from trading soon, including Sonae.com SGPS SA, owner of the country's third-biggest mobile phone company, and PT Multimedia SGPS SA, which controls 80 percent of Portugal's cable television market. They may be bought by their parent companies, analysts said.

Exchange Merger

The Portuguese stock exchange merged last year with Euronext NV in a bid to make it easier for Portuguese companies to attract international investors.

That move hasn't helped stop the decline in trading. The number of trades in the fourth quarter fell 39 percent from the year before, while the value slumped 38 percent.

The government is trying to reverse the slump in trading. It has removed a 40 percent tax on capital gains. Government officials have said the sales of Portucel and Galpenergia, which would be Portugal's biggest IPO in more than five years, may also help attract outside investors.

``Euronext, Galp and Portucel are very positive elements,'' BBVA's Claudino adds. ``But they won't change the fact that this is a small, peripheral market.''