The financial and economic crisis has already lasted for five long years, with tensions and uncertainties but also with positive signs along the year 2012. Back to a sustainable path of growth, the world economy is still in a difficult context. World economies still face a long and arduous way despite the expansive fiscal policies, the monetary loosening and the deleveraging process of both the public and private sectors.
The financial and economic tension around the world is focused in the Euro area, particularly in Spain and Italy. The tension has smoothened along the year, quite notably at the end of it. Despite the better financial context in the second semester, the economic activity in peripheral countries of the euro area has gone worse as a result of the financial restrictions to financing and the debt reduction in balance sheets of households, private companies and public sector.
In Spain the sovereign debt crisis and the economic recession has fueled uncertainty on the future of banking institutions and the possibility of reducing debt of the public sector. The risk premium of 10- year government bonds reached levels over 7 %, leaving Spain on the verge of losing access to markets and resulting in having to ask for a financial aid for banking institutions to be recapitalized.
Being the euro in minimum levels and economic weakness well spread across Europe, it was necessary to implement new measures to overcome the insufficient institutional framework of the European Union. The European Central Bank decided on July 5 to reduce the interest rates by 0.25% till 0.75%. This measure was taken a few days after the European leaders approved the financial aid to Spain up to a maximum of €100,000 million. This opened the path to an effective banking union with centralized supervision and the possibility of recapitalizing problematic banks. The turning point was at the end of July when the ECB announced a more active role in preserving the euro. This role was confirmed in September with the announcement of a plan focused on acquisition of public debt in secondary markets of countries facing financing difficulties. In case to be requested, the acquisition of bonds is subject to strict conditionality. In October the European Stability Mechanism (ESM) was launched, a new instrument of aid with a financial capacity of €700,000 million. In the context of these measures and the stabilization of the economic activity, the tensions of European debt markets were reduced and the risk premium in countries like Italy or Spain was lowered to levels under 4 % at the end of the year.
In 2012 he Spanish stock market reflected the tensions on sovereign debt. The first six months were very negative, with Ibex 35 dropping 30% till June, while the second part of the year showed a 36 % gain.
The year closed in a positive trend for international stock markets, particularly after European financial tensions soothed. International indices gained over 13%, showing the trend of recovery that started in 2009, continued in 2010 and began to change in 2011. Stock markets’ volatility was also reduced, although maintained in markets like the Spanish one, still under market stress.
Performance of continental European indices has been quite different when comparing central European countries to those at the periphery. In Spain indices had shown better performance in 2011. Ibex 35 dropped 4.7% in 2012 while DAX raised 24.4% or ATX (+ 27%). FTSE MIB (Italy) + 7.8% and PSI (Portugal) + 7.7% improved in 2012 after important declines in 2011.
S&P 500 (+ 13.4%) outperformed the international average. Nasdaq 100 (+ 16.8%) finished the year over the international average, as it did in 2011. Emerging market indicators were almost at the international average: MSCI Emerging Markets gained 13.9%.
In a global context of decline of traded volume in stock markets as a result of the uncertainty after the crisis and the regulatory changes that affect financial intermediation, the traded volume in 2012 in the Spanish stock market was €699,000 million. This decline of 24% in a year is a consequence, to a great extent, of the measures taken by the Spanish supervisory body when banning short selling positions on financial stocks in January and February and on all stocks from July till the end of the year. The number of trades in 2012 was 40.6 millions, showing a limited decline of 11%.
The Spanish market model, which the World Economic Forum has recognized as one of the most developed systems in the world, has served trustworthy to trading in terms of liquidity, transparency, valuation and guarantees for investors. In 2012 the new SIBE electronic platform was launched, which allows the trading of shares, warrants, certificates and ETFs with high safety standards and a speed ten times better. More services were offered in 2012 in order to ease the access to trading platforms.
Despite the difficult market conditions and the tensions after the banning of short selling positions, the market spreads of listed Spanish stocks stay in efficient levels. The average spread of Ibex 35 in 2012 was 0.11 %.
The traded volume in shares of the most traded Spanish companies in Europe does also reflect a satisfactory level of liquidity. And this liquidity is concentrated on the Spanish stock market, which continuous to be the reference market for Spanish stocks. Data from the EuroStoxx 50 Index shows that shares of Santander, Telefonica and BBVA are the three more liquid stocks of the euro area by traded volume. Repsol is in the position number 6, Inditex 9 and Iberdrola 16.
Market capitalization was €946,000 million at the end of 2012, 2% less that in 2011. Telecommunications and technology, basic materials, industry and construction and oil and energy lost market value while consumer goods and services gained market value. The financial services and real estate sector remained stable.
The number of companies admitted in all segments of the Spanish stock market was 3,273 at the end of 2012, slightly lower than in 2011 because of the ending and closure of some SICAVs which traded on the Mercado Alternativo Bursátil (MAB).
The results of Spanish listed companies reflected the deterioration of internal demand in Spain, the coverage increase in assets to clean up the balanced sheets and the increase of financial costs. The pressure on financial results has been particularly intense on financial entities. The various reforms have obliged financial entities to provisioning for the damaged assets. The net income of companies dropped 35.5% till September and the revenues increased 7.6%.
Many of the Spanish companies increased their international expansion in 2012. The internationalization is gaining importance every day and compensating the stagnant internal demand. In the first semester of 2012, the revenues abroad of Spanish listed companies increased 16%, to represent up to 59,63 % of the total revenues.
Despite the deterioration in profit and loss accounts the listed companies have continued to make efforts in order to maintain remuneration to shareholders. This effort has allowed dividend yields of the Spanish stock market to be one of the highest in the world (7% at the closing of 2012 by MSCI data). And all this despite a year that started with dividends being taxed higher.
In order to deleverage, raise capital ratios and satisfy remuneration to shareholders, companies turned to various ways of retribution. The most popular of all those ways was the “scrip dividend”. Total remuneration to shareholders in 2012 was over €27,150 million (€8,875 million in shares).
The need to reduce the level of indebtedness of listed companies and to balance the excessive dependence to bank loans gives stock markets an essential role in regenerating the Spanish economy. In this context the proportion of financing in the form of capital continue to grow. Listed companies increased capital by €31,505 million in 2012, a very high figure in historical terms. Many of these capital increases were related to corporate operations of restructuring and cleaning up the balance sheets of banks. The objective of these operations is to strengthen their equity and adapt to new regulations regarding capital.
In 2012, the total new investment flows channeled by the Spanish market via public offerings of sale, capital increases and new admissions amounted to more than 36,950 million dollars, getting one of the first positions in the world according to the World Federation of Exchanges (WFE). Corporate activity in terms of takeover bid was not very active: 4 corporate operations, but of a certain importance. Banco Pastor was acquired by Banco Popular in a takeover that amounted to €1,160 million. In the month of December, IAG presented at the Spanish supervisory body the intention to take over 54% of Vueling shares and Banco Santander communicated the intention to take over Banesto.
The credit restriction that currently affects the Spanish economy is particularly affecting small companies. The function of the Mercado Alternativo Bursatil (MAB) turns to be essential in this context. At the end of 2012 it had 22 listed companies, and continues to gain reputation and soundness as an alternative source of funding in an economy with a credit squeeze particularly affecting smaller companies.
In 2012 there were five incorporations (Bionaturis, Carbures Europe, Ibercom, Suavitas e 1nkemia) and nine capital increases amounting to €30 million. The combination of financing, liquidity, constant valuation and public recognition of the companies makes the MAB a very useful mechanism for strengthening the development of the local and national productive economy. Various public institutions have supported the market with tax incentives and aid for companies.
The Spanish public debt market was under great tensions in 2012. The 10-year benchmark bond rate began the year at 5.06%. In six months was 2.5 points higher and on July 24 reached 7.53%, the highest level since the introduction of the euro. This situation left Spain on the verge of losing access to public debt markets.
The European financial aid that was approved to strengthen the capital structure of Spanish banks and the more active role of the European Central Bank resulted in less tensions and interest rates of Spanish debt dropping till 5.23%. The risk premium was also reduced to 3.92 %.
Trading volumes in public debt were also affected by the year tensions and showed lower figures than in 2011. Traded volume dropped 30% en 2012, with €4,74 trillion in cash operations, according to the Central Book-Entry Office for Spanish Debt. Electronic transactions in this market, mainly channeled via the BME public debt trading platform, reached €40.034 million in 2012.
Despite the difficulties suffered by the debt issuance markets, the issuance in the primary market of corporate debt increased in 2012, with an outstanding balance of €364,000 million, ( +31%). Both the short-term and the long-term segment increased their activity. Commercial paper registered €134,347 million (+32%) and bonds rose to €229.627 million (+30%).
This positive trend was parallel to that of the international bond market, which registered a good performance, mainly in the last months of the year.
Trading in the corporate debt market was less intense in 2012 (to €2.56 trillion), half the trading of 2011.
SEND (Sistema Electrónico de Negociacion de Deuda) is an open electronic platform created by BME and particularly focused on individual investors. SEND is showing good performance both in trading volume and number of trades. The spread between selling and buying positions and the easy access to information for retail investors shows the enhanced quality of the market.
SEND will incorporate in the next future public debt issues, with the aim to encourage access to individual investors. This is a step forward in the line of a financial system with less intermediation.
The options and futures market had 67.17 million traded contracts in 2012, a similar volume than in 2011. The performance of options on Ibex 35 (+91%) and options on individual shares (+17%) is to be highlighted. If the year started with great activity, the banning of short selling positions had a negative impact in the trading.
In 2012 it is important to mention the launching of a future contract on 10-year notional bond, which aimed to serve as a coverage instrument and offer new possibilities in terms of strategies and trading. The extension of the market timetable for future contracts was also implemented in order to adapt to other international exchanges.
As in previous years since the start of the financial crisis, markets on derivatives products have continue to be the object of intense regulatory reform. Very high volumes of these products are traded over the counter, that is to say, in a bilateral agreement which is not subject to standard trading conditions. For this reason, regulatory authorities are aware of the need to enhance transparency of this trading activity and are vigilant about the possible systemic risk they involve.
In this line regulatory bodies expressed their intention to move trading of these products from the OTC market of bilateral trading to the electronic platforms by organized markets. These measures aim to achieve increasing standardization and settlement via central counterparty clearing houses. Trade Repositories will be used in the case of non-standardized OTC derivatives, which will be under a compulsory system of guarantees and margins.
In the year 2012 73 exchange-traded funds were available for investors at the Spanish Exchanges (€2,699 million under management). The number of operations increased in 27%, showing the popularity of an instrument that offers investors the possibility of using high-profile strategies.
MEFF Power offers central counter party services for derivatives on electricity. The number of participants at the end of 2012 is 39, with increasing volumes after one year of activity. The monthly average is + 72%.
MEFF Repo is another service of central counter party for public debt repos. At the end of 2012 it counted with 32 participants. The number of operations and trading volumes consolidated along the year. Since May the monthly volumes are over €100,000 million. The outstanding balance increased till an average of €28,317 million.
The year 2012 was an intense one on regulatory measures in order to cope with the difficult economic context in Spain, and particularly aimed to reorganize the banking system. In February 2012 a Royal Decree (2/2012) increased the requisites of coverage when exposing to the real state sector. Once the financial aid to Spain was approved in July for a maximum of €100,000 million (under the fulfillment of a MOU with 32 requisites), the Government included some of these requisites in the new regulation in the month of August. A new framework for restructuring and resolution of entities was established. Entities may be liquidated by selling of assets or they may have the possibility of transferring the damaged assets to a “bad bank”.
In 2012 the new European Market Infrastructure Regulation was approved. This regulation aims to enhance security and transparency in derivatives that are traded OTC, establishing a level playing field for CCPs and the new rules for interoperability of these. The Financial Markets Instruments Directive (MiFID) is being updated and MiFIR Regulation is in process.