For the international financial markets, 2014 has been a positive year on balance. The existing liquidity in the global financial system has been an important crutch and they have shown confidence in the authority of the monetary policies of the central banks, which has counteracted the weakness of the economies in many countries around the world. The general tension on the stock markets, fixed-income and derivative markets in October and December has eased.
In 2014 the US and UK economies showed satisfactory growth. They also showed signs that they might be able to leave behind the crisis for good. However, Japan and the Euro zone as a whole showed disappointing progress once again with a poor rate of economic growth and minimal rates of inflation. The rate of growth of emerging economies has also slowed significantly, particularly in South America. The economic provisions of the international agencies have been revised downwards in recent months and, specifically, in October the IMF projected international growth of 3.3% for 2014 compared with an estimated 3.7% in January.
The spotlight shone firmly on the European Central Bank in the single currency zone with expansionist monetary policy measures. It has reduced its already low benchmark interest rates twice now: in June it announced an initial cut in its benchmark rates from 0.10% to 0.15% and a reduction of 0.10% in the deposits held by the banks in the ECB. On 4 September it decided to lower rates again to 0.05% and it cut the negative rates for deposits held at the ECB by 0.20%.
Particularly noteworthy among the battery of unconventional monetary policy measures in 2014 were the announcements in June of the targeted longer-term financing transactions (TLTRO) worth EUR 400,000 million and, in September, the ABS and Covered Bonds purchase scheme worth EUR 300,000 million aimed at raising liquidity and improving the availability of credit by reducing the capital consumed by the banks. During the last quarter of the year it also announced the purchase of bank-issued ABS with an underlying of company loans. It also studied the possibility of starting to publish public debt in the Euro zone in 2015. The pressure on the Monetary Authority to implement much more aggressive measures has been intensifying over the course of the year to the extent that the year-on-year inflation rates neared zero and fear grew, leading to a even more stagnation and deflation across continental Europe.
The lax monetary policies have meant that the financial conditions of the countries of Spain's European neighbours in particular have continued to improve. The interest rates of Spain's public debt hit an all-time low at the end of the year when 10-year bonds fell to 1.61% and the risk premium was under 1.1 percentage points (110 basis points). Since the ceiling reached in July 2012, the Spanish risk premium fell by more than 5 percentage points (500 basis points) to the end of 2014.
The return to growth in Spain has been consolidated and at the end of 2014 GDP had risen for six consecutive quarters following nine quarters of recession, putting it among the group of countries with the highest rate of growth in the Euro zone. The reforms, the recovery in internal demand, the restored confidence in foreign investment, the restructuring process of the private sector and the excellent results demonstrated by the Bank of Spain in the European solvency tests performed by the ECB are some of the reasons for the change in situation of the Spanish economy. However, it still has ongoing difficulties including the extremely high rate of unemployment, the persistent deficit and increased indebtedness in the public sector as well as the new alerts such as the imbalance in the foreign balance and in the year-on-year negative inflation rates in 2014.
The Spanish stock market has shown upwards movement for two years running and in 2014 the IBEX 35 was up 3.66%, putting it among the best-performing European markets in the year showing moderate volatility and highs in October and December. It has increased by almost 75% since its lowest point during the crisis which it reached in July 2012. In general the year has been quite positive for the main stock markets around the world which have been galvanised by the confidence shown in expansive monetary policies while remaining focused on the weak growth in many important areas around the globe.
World indices were up between 2.2% and 7.7% in 2014 with US markets leading in terms of profitability. The NASDAQ 100 is up 17.9%, the S&P 500 gained 11.4% and the Dow Jones rose by 7.5%. The Japanese stock market index Nikkei was also up (+7.1%). In Europe, the Irish (+15.1%). Belgian (+12.4%) and Swiss (+9.5%) stock exchanges were above the global average. The IBEX 35 in Spain (+3.7%) was above the EuroStoxx 50 (+1.2%) and markets in Germany (+2.6%), Italy (+0.2%) and France (+0.5%). The London stock exchange (-2.7%) and the Austrian (-15.2%), Portuguese (-21.1%) and Greek (-28.9%) were down in terms of profitability in 2014. The Portuguese and Greek stock markets were affected badly by the political instability during the last half of December.
By sector, in 2014 US tech stocks continued to perform exceptionally well, driving up the NASDAQ index for the seventh year running despite the index having performed beyond expected levels before the crisis exploded in November 2007. The US bank-issued securities and those from other financial institutions in Europe and the US performed well above the world average in 2014.
By company size: 2014 was the best year for blue chip corporations (listed multinationals): the MSCI World Large Cap was up 7.5%.
In 2014 the Spanish stock market was the catalyst behind the change in the trend for early trading the year before. The volume of trading reached EUR 884,000 million and was up 26% on 2013, which was 17% up on the average in the main European markets. The increased volume in trading went alongside a considerable increase in the number of trades on the market to 71 million (up 46% on the year before) and to 472 million (up 64%).
Average liquidity by trading volumes on the IBEX 35 (the difference between the lowest purchase price and the highest selling price) has continued to improve in 2014. In November it reached an all time low of 5.5 basis points. As a result the implicit cost of the transaction was reduced for investors of Spanish securities, which concentrates more than 85% of its operations on the Spanish stock market trading platform despite the increased competitiveness between trading centres.
The excellent trading performance and liquidity for Spanish securities in 2014 is reflected in the lead position of the main European securities. The list of the 2014 top trading markets of origin for Eurostoxx 50 companies (the top 50 listed companies in the Euro zone) has Banco Santander, BBVA and Telefónica in its Top 5 and Repsol, Iberdrola and Inditex in its Top 20. The weight of the Spanish securities as a percentage of the total traded on the Eurostoxx 50 is around 19%, which is well above the weighting of the Spanish share indices (13.20%) and considerably higher than the weight of the Spanish economy in the Euro zone in terms of GDP (11%).
Spanish equities consolidated their attractiveness for Spanish and international investors in 2014. Trading by non-residents was around 80% and non-resident net investment (purchases less sales) was positive in 2012 and 2013 and neared the EUR 7,000 million mark in the first half of 2014. At the end of 2013 foreign investors owned 40% of all listed Spanish equities and the provisional data for the first half of 2014 raised this holding to over 41.5%.
Spanish families showed an increased interest in investing in the stock market and as a result the shares listed on the Spanish stock exchange has risen 5 points in the last two years from 26.1% of the total listed shares at the end of 2013. At the end of 2Q14 provisional data point to a further increase of around 27% of the total - the highest level of ownership since 2003.
Investment by Spanish families was excellent in 2014. Shares in Spanish investment funds grew 27% and neared EUR 195,000 million at the end of the year. In 2014 the net volume of subscriptions was EUR 35,500 million and the volume of shares in Spanish equity funds was up 50% on the year before. New collective investment vehicles joined the market. In 2014, the number that entered the market was 236 and the number of listed vehicles reached 3,230. Equity was approximately EUR 31,000 million with more than 400,000 shareholders.
Despite the news and the difficulties in mass distribution, investment products such as ETFs have gradually found their niche on the market and they have had a great year in Spain. Thanks to the ease with which investors can diversify investment in a market, region or strategy, they are a very effective vehicle for institutional and private investors to buy positions in the Spanish stock exchange as a whole and in other markets or economic areas.
In 2014, the volume traded was up 130% and it reached an all-time high of EUR 9,850 million with the number of transactions up 72% on 2013. The number of listed ETFs on the Spanish stock exchange reached 70, making it the most common type of fund of the effective total traded on the IBEX. Strategy-based and fixed-income ETFs have also had a good year.
The number of warrants traded was also up 8%, to EUR 819 million. The number of products available in 2014 has continued to rise, including discount, stay-high and stay-low products.
Overall capitalization of companies listed in Spain stood at EUR 1.06 billion at the end of 2014, up 13% on the end of the previous year. Since the lows of mid-2012 the listed Spanish groups of companies have increased their market value by EUR 324,000 million thanks to a rise in share prices and an increase in financing obtained via capital increases.
In 2014 Financial and Real Estate Services gained the most market value which, as a result of a number of capital increases at banks and the rising share price, meant that their value was up 12.6%, i.e. EUR 25,000 million. Consumer Services, were up 15%, Raw Materials, Industry and Construction 7.8% and Oil and Energy 3.7%.
The number of companies admitted for trading on the Spanish stock market as a whole stood at 3,452 at the end of 2014, a year-on-year increase of 207 due to the increase in the number of collective investment vehicles listed on the relevant Alternative Stock Market.
Following significant growth of 52% in 2013, aggregate profit for the listed companies as a whole remained almost the same in 2014 despite the quarter-on-quarter fall in 3Q14. However, 68% of companies showed an improvement. The net profit increase on the IBEX 35 is 3%.
Spanish listed companies are becoming more international and the contribution from international sales to their total billing is still on the up. Based on the data from 1H14, the contribution of international sales as a percentage of total income is 61.89%, i.e. up one percentage point on June of the previous year. This figure stands at 64% for IBEX 35 companies.
In line with the Spanish non-financial companies that reduced debt by EUR 300,000 million between 2010 and 2014, listed companies have had to continue to reduce debt and increase equity for a further year, Spanish shareholders have earned even higher dividends in 2014. Listed companies have broken every record held for shareholder dividends, having paid dividends of EUR 43,280 million in the year, which is 85% more than the previous year and an increase of 30% on the all-time high. This impressive record is a result of the increased income from corporate transactions carried out by Endesa. During the last ten years, listed companies in Spain have given shareholders more than EUR 266,000 million in dividends.
In line with previous years, scrip dividends have accounted for more than 30% of total shareholder payments and the return on Spanish dividends is still one of the highest in the world (5.2%) at the end of 2014 in accordance with data from MSCI (Morgan Stanley Capital International).
Consistent financing from Spanish companies and a reduction in excessive debt are together considered the conditions required to get economic growth back to a satisfactory and sustainable level.
Securities markets must have a greater role in re-booting the Spanish economy in terms of mitigating and balancing companies' over reliance on bank loans. Listed companies in Spain are leading the way in this respect by making substantial changes to their financial structure, increasing equity and spreading their financing between banks and capital markets.
In 2014, the total of 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 initial public offerings stood at €36,109 million. This figure was up on 2013 and became the seventh highest in the world and the second highest in Europe. Capital increases have been particularly significant with more than 185 transactions that have raised nearly EUR 29,000 million for companies that have made big increases to meet scrip dividend payments, thereby boosting their equity structure and, in the case of banks, their compliance with the minimum capital requirements.
A consolidated surge in admissions to trading was seen around the world in 2014. During the first nine months of the year, the IPO figure stood at USD 186,600 million up 94% on 2013 in accordance with E&Y. The Spanish market has also experienced the same trend and 13 companies carried out public offerings before they were admitted for trading in different segments on the market. In many cases there was an effective uptake in equity. Seven of the companies were admitted for trading to the mainstream stock exchange: Hispania Activos Inmobiliarios, Edreams Odigeo, Applus Service, Logista, and the real estate trusts (SOCIMIS) Lar España, Merlin Properties and Axia Real Estate. The other seven companies were admitted for trading on the alternative stock exchange in Spain (MAB). In 2014 Endesa made an IPO worth more than EUR 3,100 million under the umbrella of the company's restructure. All of these transactions as a whole have generated almost EUR 8,000 million.
Following the trend in recent years, corporate business activity generated as a result of takeover bids has not been common and there have been six hostile takeovers including most notably the food chains Campofrío and Deoleo.
Small companies are suffering the most from the credit restrictions because they rely heavily on loans from banks. The Spanish government with the support of BME (Madrid Stock Exchange) has proposed a range of solutions to improve the current situation, chiefly among them are the alternative methods of financing from MAB for smaller companies and the Alternative Fixed-Income Market (MARF).
At the end of 2014, there are 26 companies listed on the MAB-EE and three on the MAB-SOCIMI segment. In 2014 there were six new additions: NPG Technology, Facephi Biometria, Only Apartments, Euroconsult Group, Home Meal Replacements and Mercal Inmuebles real-estate trust. The new companies received additional financing of EUR 58 million upon their inclusion. Listed companies have performed 16 capital increases totalling EUR 124 million.
The MARF has ended its first year by successfully meeting the target for which it was initially created, i.e. to add corporate debt as a new source of financing for Spanish companies in addition to bank loans. Since its inception it has completed 12 fixed-income issuances, seven medium-term and five short-term, showing that it is capable of issuing different types of security under different terms. The new methods of financing that have started to enter the market include the loan backed securities for the SME and the project bonds used to finance specific projects.
The MARF, which has been formally set up as a multilateral trading system (SMN), was brought into line with the recent changes in European and Spanish regulations and has been implemented through an electronic trading platform that offers greater transparency and liquidity, ensuring orders are executed more effectively and the investor is suitably protected. The MARF has less stringent and more flexible requirements than the official regulated markets, which means companies are served more quickly and efficiently at a reduced cost.
2014 has been a phenomenal year for state bonds in the Euro zone due largely to the ECB's expansionist policies which have fostered all-time low interest rates in many countries including Spain, which has benefited from extremely low interest rates. The interest rates for 10-year Spanish government bonds began the year at 4.14% and ended it at 1.61% which represents an all-time low that is below the rates seen in heavyweights such as the US and UK. The risk premium of Spanish bonds, the differential with the German government 10-year bonds was down more than 1 percentage point in 2014 and was less than 1.1 percentage points at the end of December - a far cry from the highs of 2012.
In 2014 the volume settled via the BME on the Spanish public debt market reached EUR 6.3 billion for spot transactions, up 24% on 2013. In 2014 the BME's electronic public-debt trading platform was up again with a cumulative trading volume of EUR 109,506 million (i.e. up 64% on 2013). The number of transactions was also up 33%.
Virtually all of the segments on the world corporate debt markets experienced a general contraction in interest rates and volumes issued. In view of the foregoing, the number of companies admitted to trading on the BME markets fell again in line with the trend in prior years. The new volume issued reached EUR 115,000 million in 2014, down 11.8% on the previous year. Trading was also down 14.5% to EUR 1.09 billion over the course of the year.
At a time when a large number of Spanish companies are issuing company debt (some for the first time), the reasons for the low volume traded and admitted to trading are a result of the drop in the number of issuances in Spain. This move towards other markets is causing serious damage to the Spanish corporate debt market despite the huge changes to regulations in order to buoy up access to credit.
Trading on SEND the electronic fixed-income trading platform for individuals reached EUR 2,213 million in the year, down 19% on 2013.
In 2014 just over 56 million contracts were traded on MEFF, the BME's futures and options market, 3% less than in the previous year. In general volatility has not increased since 2013. However, there were peaks in October and December.
In 2014 trading of futures and options on the IBEX 35 has represented the bulk of the volume traded in 2014. It is a sign of the recovering economy and the Spanish stock exchange and the growing popularity in ETF-backed passive portfolio management on the Spanish index. Futures trading on the IBEX 35 is up 24% on last year and trading of options on the IBEX 35 has had three very good consecutive years of recovery, up 42% in 2014.
The market has been operating normally following the changes to its structure in 2013. Remember that the new regulations on the securities and financial instruments markets in Europe separated market activities from clearing house, settlement and counterparty activities. The trading business stayed with MEFF Sociedad Rectora del Mercado de Productos Derivados while the recently formed BME Clearing was allocated the clearing house business.
MEFFPower is the BME's service for the electricity market, and is provided through BME Clearing, which allows the derivative transactions on electricity production in Spain to be cleared via a Central Counterparty house. Since June 2014, this house's activities have been performed with the support of the trade registration service of the MEFF market before the clearing process. The number of operators was up 34% in 2014 and it had reached 78 by the end of the year.
In 2014 the volume of registered business reached 32.1 TWh, which accounts for 12% of electricity production in Spain. The number of registered transactions was up 30% to 5,082 in 2014. At the end of 2014 the volume of open positions was 2.6 TWh, up 13% on 2013.
The central counterparty services provided by BME Clearing also include MEFFREPO which offers a central counterparty service for public debt repos. At the end of 2014, the service has 27 members with average monthly volumes of more than EUR 93,000 million in the year. The outstanding balance of unmatured transactions for which MEFFREPO is a counterparty is down slightly to under EUR 25,000 million.
In 2014 there was increasingly mounting regulatory pressure to channel the trading of derivatives instruments traded throughout the world on to organised markets and to centralize settlement through central counterparties (CCPs), making the use of transaction registers such as Trade Repositories compulsory for all types of derivatives, particularly OTC derivatives that are difficult to standardise. The aim of the reforms is to mitigate systemic risk by improving risk management, reducing interconnections between positions and increasing transparency.
Further to the effective obligation envisaged in the EMIR European regulation, which stipulates that derivative transactions on all types of financial assets must be recorded in a register, in January the REGIS-TR came into effect. REGIS-TR is a European register (trade repository) that was designed by the BME and the German stock market following authorisation from ESMA, the European securities market supervisor.
The service has been very well received in most EU countries and it had more than 800 clients at the start of the reporting obligation. In Spain most financial and non-financial institutions opted to use REGIS-TR as a repository because the BME infrastructure was used to provide the service. During the first year alone, the number of transactions recorded in REGIS-TR was over 1,300 million.
Changes in structural legislation aimed at improving the economic situation in Spain remained equally strong in 2014.
Laws providing support to new start-ups and established companies facing financial difficulties have been crucial. Most of the legislation known as Business Person Law (Law 14/2013) entered into force in the year and in October Law 17/2014 was passed, enacting urgent measures on refinancing and restructuring of company debt and amending the Insolvency Law. The approved law aims to secure the survival of companies that have accumulated excessive debts that are feasible from an operational point of view by implementing an organised balanced system of insolvency procedures and a more extensive range of refinancing methods.
At the end of the year the Corporate Financing Law is at its final stage. The objective is to provide alternative financing to banks for the SME. The main measures that regulate it support the transition of companies from the MAB to the mainstream stock exchange in Spain when certain circumstances that make it advisable arise. This Law also regulates the establishment for the first time by Spain of a legal regime for crowd funding.
On 14 November the Venture Capital Law and other closed collective investment laws were made effective. Its other aims include promoting new direct sources of financing for companies, by making the financial process of venture capital companies flexible.
The most significant approved legislation is probably the fiscal reform, which will have the biggest effect on the financial area in the future It was published on 28 November in the Spanish Official State Gazette and it comprises three laws: Law 26/2014, which amends the Personal Income Tax Law for residents and the Non-residents Income Tax law, Law 27/2014 which amends Corporate Tax Law and Law 28/2014 which amends the Value Added Tax Law and adopts other tax and financial measures.
The new framework, which entered into force in January 2015. has been a sea change in the way personal income and savings are taxed in Spain. Measures include the gradual cut in interest rates, a uniform treatment of gains, an end to the exemption from income tax on dividends, a change in the way pre-emption rights are accounted for and, in the world of business finance, a limit on the amounts deductible for tax purposes with respect to borrowing costs and equity incentives.
And finally, after long drawn-out negotiations and debates the most important news on the securities markets was the approval of Directive 2014/65/EU of the European Parliament and of the Council (MIFID II) and Regulation 600/2014 (MIFIR). The rules compose the new framework of EU requirements applicable to investment service firms and to regulated securities and financial instrument markets. The change will be effective from 3 January 2017 onwards.
Regulation 909/2014 entered into force in 2014 across the EU. It envisages increased liquidity in securities and central security repositories which will open up to the competition the functions provided by these entities: central issuance, settlement and custody register.
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