Tensions in the international financial markets eased during the course of 2013 and expectations that the world economy will return to a path of sustainable growth have improved. Developed nations, led by the US, Japan and to a lesser extent Europe, have started to show signs of definitively pulling out of recession, although uncertainties remain over the potential impact of the withdrawal of the monetary stimulus policies applied by central banks since the start of the financial crisis.
In the eurozone, financial conditions continued to improve in peripheral countries due mainly to the ECB's more active policy. The slowdown in economic activity appears to have bottomed out although growth forecasts for the next few years are far from brilliant. The more active stance adopted by the ECB to defend the single currency, boost the European economy and combat the persisting financial fragmentation was reflected in the two interest rate cuts implemented in 2013 and the measures introduced to reactivate the bank lending channel. On 2 May, the benchmark interest rate was cut by 0.25 points to 0.5% and on 7 November by a further 0.25 points to 0.25%, the lowest ever rate in the history of the single currency. The ECB has also stated its intention of keeping rates low for as long as necessary to ensure economic recovery.
Spain has shown the greatest improvement in the euro area, where financing conditions for businesses and the public sector and the uptick in economic activity to reach slightly positive growth figures and the domestic and international perception of the strength of its banking sector are all positives, although imbalances and uncertainties persist in relation to the high unemployment rate, the stubborn public sector deficit and the process of rapidly reducing the debt built up by households, companies and banks. Between the turning point reached in late July 2012 and year-end 2013, Spain's risk premium dropped by more than 4 percentage points.
Equities were the protagonists in 2013. The Spanish stock market rose after three consecutive years of losses, gaining 21.5% (among the best performers in Europe), continuing the trends initiated in July the previous year, and accompanied by a sharp decline in volatility. The world's leading stock market indices also made significant gains, with share prices rising and volatility falling in response to the improved economic and financial outlook.
The world's indices gained around 25% overall and volatility also dropped considerably. Japan and the US outstripped the world average, boosted by the powerful monetary policies adopted by their respective central banks. The Japanese Nikkei 225 index climbed almost 57% while the Nasdaq 100 was up 35%, the S&P 500 gained 29.6% and the Dow Jones 26.5%. Indices in the euro area also rose across the board with the EuroStoxx 50 gaining 17.9%. Emerging market indices lagged behind, with the MSCI EM rising a mere 0.3%
By sector, in 2013 US tech stocks continued to perform exceptionally well, driving the NASDAQ index above the highs reached before the crisis in November 2007. Listed SMEs also stood out during the year (the MSCI World Mid Cap climbed 28.5%) in addition to European and US financial stocks (the MSCI World Financials Index gained 27.8%).
2013 saw a change in trading trends on the Spanish stock market and the year closed with equity turnover of €703,658 million, 0.67% more than in 2012. This change in trend started to become visible in the second half of the year, and culminated in October with €91,861 million traded, 30% more than in the same month the previous year and the highest volume recorded in twenty seven months. The fact that this change has been accompanied by a pronounced improvement in the liquidity of market positions and an increase in the number of transactions and orders is also extremely positive.
The progressive improvement seen in the trading spread (the difference between the best buy and sell price) in 2013 makes operations easier and trading costs significantly lower. The implied transaction cost, measured as the average buy-sell spread on the IBEX 35 index, reduced by more than 2.5 basis points during the year, from an average of 0.102% in 2012 to 0.077% in 2013. The spread on the main indices has also reduced significantly.
Additionally, the 48.6 million transactions executed (+19.7%) on the Spanish market trading systems in 2013 represented a record annual high. A monthly record was reached in October with 6.3 million cross trades effected. The number of orders processed by the Spanish stock market climbed from almost 100 million in 2012 to around 300 million in 2013.
All these factors reflect how the Spanish market trading system accounts for almost 90% of all transactions carried out with the shares of Spanish companies listed for trading at BME, despite the growing competition from international trading venues. The on-going implementation of more and improved systems for accessing the market (such as co-location or remote access services) and the development of more flexible figures with capacity to act such as the new non-clearing trading members are steps to ensure higher market standards.
The increase in liquidity further underpins the position of shares of listed Spanish companies as some of the most widely traded in Europe. In the ranking of the Eurostoxx 50 index, which includes the 50 leading stocks traded on stock exchanges in the euro area, the shares of Banco Santander, BBVA and Telefónica were listed in first, second and third place by the value of the annual trading amounts of their shares in 2013. Inditex ranked 10th and Iberdrola and Repsol in 19th and 20th position respectively. The six Spanish companies in the ranking accounted for 20% of the total amount traded on the 50 stocks on the index, much higher than their weighting by capitalisation or market value (12.38%) and even higher than the weighting of the Spanish economy in the euro area in terms of GDP (10.80%).
The year was marked by increased investor interest in Spanish equities. Trading by non-residents was once again almost 80% and net foreign investment (purchases less sales) in the market was positive from December 2012 to June 2013. The non-residents sector holds 40% of the value of all Spanish stocks traded on the index and, to May 2013, some 9,000 international investment funds owned shares in a company listed on the IBEX 35 for a total aggregate amount of €72,000 million.
The Spanish bourse has also regained some of its attraction for household investors in the last two years. At year-end 2012 household investors owned nearly 25% of the value of all Spanish stocks traded on the market as a result of their improved financial situation and choosing to receive dividends in the form of shares (scrip dividends) from some major companies. This trend remained in place in 2013.
The increase in the number of listed SICAVs and their market value also makes the equity market a more attractive option. Capitalisation increased by 31% in the year to over €32,000 million, approaching its historic high. In the last few months of 2013 SICAV portfolios increased their exposure to both Spanish and European equities.
Exchange traded funds, or EFTs, were among the most prominent investment vehicles of the year. Thanks to the ease with which they allow positions to be built in an economy or region, EFTs are an efficient vehicle to enable large institutional investors and a growing number of individual investors to take positions in Spain. Assets managed by all ETFs linked to the IBEX 35 index stood at €1,244 million at year-end 2013, an increase of 248% compared to the beginning of the year.
In 2013, a total of 68 ETFs were listed on the Spanish stock market, for a cash amount of €4,283 million traded, 62% more than the previous year. Equity ETFs accounted for 99% of total trades.
The combined capitalisation of the companies admitted to trading on the Spanish stock markets once again exceeded €1 billion in 2013, specifically, €1.05 billion, 10.5% higher than the figure seen in 2012.
Sectors creating the highest market value include Consumer Services (capitalisation +58%) through the aeronautical company IAG and communications firms. The numerous capital increases made by banks, in addition to the share price gains in the sector led to a 36% rise in the market value of the Financial and Real Estate Services sector, recouping more than €53,000 million in the year.
The market value of SMEs also increased significantly. Specifically, the market value of the stocks forming the IBEX MEDIUM CAP index climbed by 59%.
The number of companies admitted for trading on the Spanish stock market as a whole stood at 3,245 at the end of November, an increase of 45 compared to 2012 due to the increase in SICAVs dedicated to these companies listed on the Alternative Stock Market (MAB).
After two years of decline, the aggregate earnings of listed companies grew by 19% in the first nine months of the year compared to the same period the previous year. This change in trends was based on lower allocations to provisions (extremely important in the banking sector), growth in revenue from foreign markets and extraordinary earnings. During the year, listed companies continued to reduce financial leverage and strengthen their capital.
Growing international diversification, one of the main attractions of listed Spanish companies, and sales to foreign markets now account for 61.79% of the total, almost half a point more than the previous year.
Further, Spanish stocks are still characterised by their high shareholder remuneration. Listed companies paid €23,414 million to shareholders in 2013, 13.8% less than in the previous year. This means that the dividend yield of the Spanish bourse is still one of the highest in the world standing at 4.7% at year-end 2013 according to MSCI data (Morgan Stanley Capital International). Continuing the trend seen in recent years, payment in shares accounted for 41.4% of total shareholder remuneration. These payments were made mainly in the form of scrip dividends whereby investors can choose to receive payment in cash or in shares.
One of the priorities of the Spanish economy is to return to healthy and sustainable growth rates without reducing corporate debt levels and to balance out the excessive dependence on bank borrowings. Therefore, the stock markets should play a more important and vital part in the regeneration of the Spanish economy's productive fabric. This movement is being headed up by listed Spanish companies through increasingly more visible changes in their financing structure.
In 2013, total new investment flows channelled through the Spanish stock markets by means of new shares from capital increases, new admissions to trading and public sale or subscription offerings stood at more the €32,000 million, one of the highest rates in the world. Capital increases have been especially important, with more than 154 operations that have raised €37,300 million for companies, a historically high figure. In the same way as the previous year, banking entities were the most active, accounting for 88% of the total volume of shares issued through capital increases during the year in a bid to shore up their equity and adapt to the new regulatory capital requirements.
Further, corporate operations linked to take-overs were scarce, with only six bids taking place, two of which were associated with the integration of the airline Vueling into the IAG (International Consolidated Airlines) Group.
As 2013 progressed, tensions in the euro area sovereign debt markets eased and Spain was one of the countries to benefit most. After the turning point reached in late July 2012 following the statement made by the head of the ECB reiterating his firm commitment to the euro, the Spanish risk premium, which was at 6.30 points, declined by more than 4 percentage points to reach 2.20 at the year end. In 2013, the risk premium fell by almost 1.7 points, substantially improving financing conditions for the Spanish Treasury, and for Spanish companies which have been able to make numerous bond issues under favourable terms.
The Spanish 10Y bond yield was 5% at the start of 2013 and fell sharply to 4% in May. From there, it rose again to 5% in June in line with global bond market trends, to fall steadily to close the year once again at around 4%. Trading on the Spanish public debt market in 2013 was slightly more intensive than the previous year despite the reduced volatility. According to the Spanish Government Debt Book-Entry Account, the volume of simple spot purchase and sale transactions increased by 6.9% to €5.07 billion. Cumulative trading volumes on BME's electronic public debt trading platform stood at €64,000 million, growth of over 50% compared to the previous year.
The protagonism of the Public Debt market has had a draining effect, impacting the corporate debt market where activity and trading volumes were lower than the previous year. However, activity on BME's private fixed income platform, SEND, continued to grow steadily, chalking up trading volumes of €2,671 million in 2013, an increase of 121% compared to the previous year, while the number of transactions effected rose by 154%. Throughout 2013, Spanish public debt securities were included on the SEND platform, a tremendous step towards improving the transparency of the Spanish fixed income market and making it more available to private investors. This gives private investors access to all outstanding government issues via SEND.
Small companies are suffering most of all from the credit clampdown due their extreme dependency on bank borrowing. Foremost among the (necessary) solutions considered to improve this situation is the establishment of financing alternatives based on the equities market such as the MAB for expanding companies, a market developed by BME and designed to facilitate the access of SMEs to the equity markets and the Alternative Fixed Income Market (MARF), a fixed income trading system set up in 2013 and aimed at institutional investors. At year-end 2013, 23 companies were listed on the MAB for expanding companies and the first issues to be traded on the MARF were being prepared. These instruments have been recognised as a launchpad for a change in the financing model of Spanish companies by various public institutions.
In addition to the inclusion of shares of the Bulgarian company EBIOS on the MAB through a public subscription offering, companies already listed on this index carried out 14 capital increases, raising around €46 million. Since its creation five years ago, the MAB has channelled financing of approximately €180 million, more than half through operations subsequent to the listing of the shares, reflecting the importance attributed by investors to a company's trading performance on the market and compliance with its regulations.
Furthermore, the creation of the Alternative Fixed Income Market (MARF) is the most significant event to affect the Spanish fixed income market. This initiative was put forward by the Spanish government in compliance with its commitment with the European Union to help small and medium sized companies gain access to financing more easily and under better terms, in this case, through the issuance of fixed income securities.
Companies accessing the MARF for financing will benefit from less demanding and more flexible requirements than on the official regulated markets, making processes faster and more agile and less costly although the issuer will be expected to provide the information necessary for the analysis that investors require for all issues to ensure that the securities listed on this market meet the appropriate requirements.
The MARF has been formally set up as a multilateral trading system (MTS), adapted to the recent changes in European and Spanish regulations and developed through an electronic trading platform that offers greater transparency and liquidity, ensuring orders are executed more effectively and the investor is suitably protected.
Just over 54.5 million contracts were traded on BME's futures and options on equities market, the MEFF, in 2013, 18.5% less than in the previous year.
The increased appeal of the Spanish stock market drove trading on IBEX 35 futures up 17.6%, and options traded on the IBEX 35 rose by 23%, the best performance in the past four years.
The sharp correction of volatilities on the spot market had a more negative impact, reducing the need for coverage. Trading of contracts on individual shares were most affected in 2013, in line with the rest of Europe.
The business and organisational structure of the Spanish futures and options market has changed significantly in response to the new European regulations on the infrastructure of securities markets and financial instruments. The Trading activity has been definitively separated from the Clearing activity. In this way, the MEFF has been established as the management company for the futures and options markets, while central counterparty functions for transactions will be carried out by BME Clearing, encompassing all BME's central counterparty activities.
Regulatory pressure on derivatives markets remained intense in 2013 in order to channel trading in these products towards organised markets and their settlement through central counterparties (CCPs) while at the same time implementing the use of transaction registers, such as Trade Repositories in the case of non-standardised OTC derivatives. The aim of the reforms is to mitigate systemic risk by improving risk management, reducing interconnections between positions and increasing transparency.
In 2013, REGIS-TR, the European register (Trade Repository) developed jointly by BME and the German bourse obtained authorisation from the European supervisor ESMA to start operating. This is a European repository for transactions involving derivatives, both OTC and those listed on the organised markets, on various asset categories creating to comply with the new EMIR regulations. REGIS-TR will start to operate as a trade repository from January 2014.
MEFFPower is BME Clearing's service for the energy market, where Spanish energy derivatives contracts traded bilaterally (OTC) between the leading domestic and international power companies, investment banks, funds, European trading entities and medium-sized energy sellers can be registered. The service was inaugurated in March 2011 and, in a short space of time and against a backdrop of strong competition, has secured a position for itself, attracting 58 participants at year-end 2013.
MEFFPower achieved exponential growth in 2013, increasing the volume of power registered fourfold, with a 44% increase in the number of participating entities. 3,914 transactions were registered in 2013, increasing by 3.8 times.
The central counterparty services provided by BME Clearing also included MEFFREPO, which performs this service for public debt repos. At year-end 2013, the service had 29 participating entities with average monthly volumes of around €110,000 million. The outstanding balance of transactions in which MEFFREPO acts as counterparty has increased to an average monthly average of over €30,000 million.
In line with developments seen since the start of the financial crisis, 2013 was once again a year of far-reaching structural regulatory measures to address the economic situation in Spain. While in 2012 the regulatory focus was on the restructuring of the banking sector, in 2013 measures were implemented to improve the operations of Public Administrations, products and services markets, to support entrepreneurs and small businesses and their financing and social protection.
Regulations passed include measures approved to boost new economic activities, as reflected in Law 11/2013 on support measures for entrepreneurs and youth employment, growth stimulus and job creation and Law 14/2013 to support entrepreneurs and internationalisation. The objective of the aforementioned law is to facilitate all entrepreneurial business activities, from the incorporation of companies and their tax regimes, to financing support and the need to improve relations between companies and public administrations. Equally important are the measures implemented to shore up the sustainability of the pension system (Royal Decree Law 5/2013); to prevent the eviction of people defaulting on their mortgages (Law 1/2013); to make the housing rental market more flexible and developed (Law 4/2013) in addition to the financing mechanisms established to eradicate default by public administrations (Royal Decree Laws 8/2013 and 13/2013).
In the securities markets, on 31 January the CNMV agreed not to extend the ban on short-selling which expired on that date, as the circumstances which had given rise to this measure were no longer relevant. The ban had been established on 27 July 2012 due to the extreme volatility afflicting the securities markets which could potentially impede them from functioning correctly. The ban was initially adopted for a period of three months. However, given the on-going restructuring of the banking sector to cover its combined capital requirements and the application of regulation 236/2012 of the European Parliament and of the council on short selling and certain aspects of credit default swaps in the autumn, the CNMV ruled to extend it until 31 January 2013.
In April, Ministry of Economy and Competitiveness Order ECC/680/2013, amended Iberclear's Regulations and allowed the introduction of non-clearing trading members, which facilitated access to the Spanish stock markets. Members of Spanish stock markets wishing to act as non-clearing trading members must have a signed agreement with a participating entity of Iberclear, which will be responsible for all registration, clearing and settlement obligations.
In 2013, Corporate Governance disclosure requirements were significantly changed, and the disclosures required in the annual report on this subject were expanded (ECC order /461/2013). Additionally, the CNMV approved a series of regulations to offer additional protection for customers receiving investment services and transparency measures for collective credit institutions.
The notice issued by the CNMV in July on the adaptation of CCI management companies and venture capital firms to EU directive 2011/61, on alternative investment fund managers (AIFMD), was also important. Measures adopted include procedures for the cross border selling of alternative investment products, which established that for exports of Spanish products the CNMV will issue certifications for Spanish fund managers complying with the Directive, acting as a passport or authorisation to manage and sell their alternative funds to other EU countries. These measures were adopted to prevent Spain from operating at a disadvantage with respect to other countries as the AIFMD directive of 22 July had not been transposed to Spanish law.
European measures include the roll out of the EMIR regulation, aimed at giving the OTC derivatives market more security and transparency and reducing system risks, establishing common rules for central counterparties (CCPs) and those governing interoperability between services. The directive governing financial instrument markets, MiFID II and the MiFIR regulation is expected to be approved shortly.
Lastly, the European Banking Authority (EBA) guidelines on honorability, experience and good governance in financial entities has been included in Spanish regulations. Despite the non-binding nature of these guidelines, Spain has expressed its intention of adopting them in order to boost confidence in the Spanish banking system. The measures were officially introduced in April through Royal Decree 256/2013.
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