2016 was a year of persistent uncertainty and controlled tension on world finance markets, affected by the monetary policies of the main central banks and also by the expectations and final outcome of two major political events with enormous economic implications: the decision to leave the European Union (Brexit) which won over the Remain camp in the UK referendum in June, and the Republican victory of Trump in the US elections in November.
Expectations of a surge in inflation and a hike on intervention rates by the US Federal Reserve drove up long-term interest rates in the last months of 2016, impacting the world's public and corporate debt markets. Conversely, on equity markets investors chose to wait and see, and in the last weeks of the year they responded well to factors such as a slight upturn in worldwide economic expectations, a weak euro and continuation of an expansive monetary policy in Europe, and the ambitious infrastructure investment plans of the new US government; to a certain extent this placed on standby the economic and geopolitical risks that plagued stock markets for most of 2016 and have not yet disappeared.
In the course of the year, international bodies confirmed the belief that the world economy had embarked upon a phase of slight growth, which will not easily revert and entails political risks. Specifically, the IMF brought its world growth assessment for 2016 down on two occasions to 3.1%, although the second downward review in October was barely a tenth of a point. Meanwhile, the lower growth in international trade in 2016 of less than 2% reported by the WTO also put the brakes on the world economy.
In Europe, overall GDP growth figures in the eurozone for 2016 showed a minor recovery in the last months of the year to 1.6%, still a far cry from an excellent result. In response to this sluggishness, the European Central Bank (ECB) was centre-stage again in the single currency zone, cutting its intervention rate to a record 0% in March amid a raft of expansive measures: an extension of the quantitative easing programme (QE) to include issue-grade corporate debt, targeted longer-term refinancing operations (TLTRO) for banks and negative rates for the deposit facility. At its last 2016 meeting in mid-December, the ECB again extended the timeframe for debt purchases to the end of 2017, reducing the volume of purchases to EUR 60,000 million per month as of March 2017.
Like the previous year, the Spanish economy did well in the international context with estimated GDP growth of around 3.2% in 2016, placing it at the forefront of the world's major developed countries. Despite the political uncertainty caused by a repeat of general elections, the high levels of job creation, low interest rates, still low energy prices, a weaker euro and debt-shedding in the private sector assisted an excellent performance in terms of private consumption and exports. Spain still has some serious imbalances, however, and a number of threats such as high unemployment, problems in reining in the public deficit, rising public debt and political and territorial uncertainties produced by the election results.
The IBEX 35, the main Spanish stock market index, finished 2016 slightly down by 2.01%, following a 7.6% gain in the last month of the year. Taking dividends into account, profitability is around 2.6%. From its lowest marks in 2016, which arose in the aftermath of the UK referendum, the IBEX 35 had regained 22% by year-end.
Stock market indexes around the world finished 2016 with gains ranging between 6.7% and 4.8% on the major trading floors. European stock markets showed disperse results during the year, despite the continuation of a strong expansive trend in ECB monetary policy. The eurozone's EuroSTOXX 50 ended the year with a gain of 0.7%, while the larger STOXX Europe 600 index was down slightly by 1.2%. Poorer performances were observed, among other countries, in Italy (-10.2%), Switzerland (-6.8%) or Spain (-2%), and better performances by Portugal (-0.2%), Germany (+3.6%) and France (+4.8%), all considerably hampered by price listings in the banking sector, which was chastised on all trading floors. The best performances on European stock markets in 2016 were notched up by the Netherlands (+9.3%), Austria (+9.2%) and - outside the single currency area - Norway (+14.6%) and above all exchanges in the UK (+14.4%), where listed companies received a boost from a major devaluation of sterling in the wake of the Brexit victory in the June referendum.
US markets again demonstrated great sturdiness despite the changing trend in the Federal Reserve's monetary policy, a sluggish world economy and several excellent annual performances over the last five years. Profitability on the main indexes in 2016 outstripped world averages: the Dow Jones rose by 13.4%, the S&P 500 gained 9.5% and the Nasdaq 100, the benchmark tech index, 5.9%.
Following a very poor previous year, 2016 was largely favourable to emerging markets, and to Latin America in particular. The MSCI EM global market gained 7%, although performances by economic areas were quite disperse. Latin America showed the best profitability in stock market terms, and the MSCI EM Latin America index rose by 21.3%, mainly assisted by Brazil, where the Bovespa gained 38.9%. Emerging markets in Asia did not fare quite so well, and the index climbed by only 4.5%. By sectors, banks in the USA gained 21.3% in 2016 to drive up the US stock market. Conversely, 6.8% was shaved off the STOXX Europe 600 Banks index.
The brunt of an uncertain economic and political environment on both the domestic and international fronts was borne by the amounts traded, down for most listed fixed income and equity income products.
Volumes of equities traded on the Spanish stock market in 2016 stood at EUR 652,907 million, 32% less than in 2015. This decrease was not restricted to the Spanish securities market, but was also reflected in trends on the main world markets, indicating the intense globalisation of the portfolios of major investors and the global dynamics of capital flows faced by stock markets worldwide.
The overall number of trades in the year was 54.4 million, down by 12.1% against the previous year, but still a large number compared to record figures in both 2014 and 2015.
However, the lower volume of trades in 2016 did not have an adverse effect on the liquidity of the equities market: the average aggregate corporate price spreads on the three main indexes, IBEX 35, Medium and Small Cap, are still at record lows, bringing down the implicit cost of stock market transactions for those investing in Spanish shares, accounting for three quarters of operations on the Spanish platform despite growing competition between trading floors.
The main Spanish share listings again ranked among Europe's most widely traded and liquid assets. The ten most widely traded shares in the eurozone included three Spanish companies, while another two Spanish companies were ranked 19th and 25th. It should also be pointed out that trading in the shares of the 30 companies making up the IBEX Small Cap (+9%) notched up a much better performance than the IBEX 35.
Most investors on the Bolsa were still non-Spanish: more than three quarters of trading was accounted for by non-resident buyers or sellers, and provisional data show that they held 43.5% of Spain's listed equities at the end of June 2016. Stock held by Spanish families also showed a slight increase to just over 25% in June, following a considerable improvement in their net financial wealth as the result of persistent debt-shedding. Conversely, banks reduced their holdings in Spanish listed equities to a record low of 3%, when barely 10 years ago they accounted for some 15%.
Collective Investment Vehicles ("IICs") had an excellent 2016, in continuation of a four-year trend during which both the assets and numbers of Spanish IICs and the portion of foreign IICs sold in Spain rose by 100%, in terms of both net wealth and numbers of vehicles. Spaniards hold more than EUR 350,000 million in funds and investment companies inside and outside Spain, and EUR 190,000 million have been channelled into these savings instruments over the last four years.
The assets of Spanish investment funds increased by 4.5% in 2016 to almost EUR 235,000 million, with 8.3 million fundholders. Net subscriptions totalled EUR 14,000 million. The assets of foreign IICs sold in Spain and held by Spaniards amounted to almost EUR 113,000 million, almost one third of the total assets of foreign IICs sold in Spain, well above the 8% accounted for at the outset of the crisis.
Listed REITs or Real Estate Investment Trusts consolidated their role as a particularly useful instrument on the property market, as real estate rental vehicles on the securities market. With 17 additions in 2016, 32 companies have now embraced the concept, which has listings in different segments of the Spanish stock market.
The overall capitalisation of companies listed in Spain stood at almost EUR 1.04 billion in 2016, up by 6% against the end of the previous year. Since the lows of 2012, excluding companies registered abroad, Spanish listed companies have seen their market value rise by EUR 330,000 million.
By sectors, Spanish Oil and Energy companies increased capitalisation by almost 3%, Consumer Services by 2%, and the Basic Materials, Industry and Construction sector also by 2%, thanks to earnings by companies operating in the steel sector.
At 31 December 2016, 3,506 companies had price listings on the Spanish stock market, 97 fewer than the previous year, mainly due to the departure of 136 SICAV collective schemes, most of which were dissolved and added to investment funds. Over the full 12 months of 2016, 47 companies began trading on Spain's equity-income market: 4 on the main floor, and 43 in various segments of the Alternative Securities Market (MAB).
Year-on-year earnings by Spain's listed companies improved in the course of 2016 and had reached positive territory by the end of the third quarter, with a gain of almost 20% in the aggregate profit of non-financial IBEX 35 companies, and a slight drop of 3.8% for banks on the index.
Figures for the first half of the year show that the 2016 contribution by foreign sales to the total turnover of Spain's listed companies hit an all-time high of 65.3%, outstripping 2015 by more than one point. This growing trend of globalisation in the income of listed companies may also be observed in the larger listed players: the portion of total turnover earned abroad by IBEX 35 companies in 2016 was 65.5%, compared to 63.8% in 2015.
Dividends made a positive difference once again, shoring up the Spanish stock market. Listed companies paid out EUR 27,136 million in dividends to shareholders during the year, an increase of 3.2% compared to 2015. The total payout, including share premium refunds, was almost EUR 27,600 million.
The return on dividends for all listed companies was 4.5%, again leading the securities markets in developed countries, according to figures published in the monthly MSCI Blue Book at year-end 2016 for these markets. For almost the last 10 years the Spanish stock market's dividend yield has been the highest of the world's developed exchanges, showing an average (based on monthly data) over the last 30 years of around 4%. It also ranks as the highest on the international stage in comparison to its counterparts in terms of size and development, according to Blue Book data.
The option of paying investors in shares (scrip dividend) accounted for 22% of total remuneration, a considerable reduction compared to 40% in 2013. For the second year running, share redemption operations totalled almost 3,400 million in terms of market value.
Although 2016 was not an outstanding year, some significant figures were observed for one of the Spanish stock market's fortes, its ability to channel new investment and funding. In 2016, total new investment and funding flows channelled via new shares from capital increases, new admissions to trading and public sale/subscription offerings stood at almost EUR 28,580 million, down by 31% against the hugely successful previous year.
The prevailing uncertainty on stock markets for most of the year hampered public offerings worldwide. According to the EY Global IPO Trends report, in 2016 world IPOs fell by 16.1% against 2015 by numbers of operations, and by 32.8% in terms of incoming volumes. On Spanish stock markets, public offerings were mostly accounted for in the second quarter by placements and subsequent listings of Dominion, Telepizza and Parques Reunidos - the last two were Europe's two largest operations in the year.
27 new companies joined Spanish exchanges in 2016: four of them entered the main market through public sale and subscription offerings, and one was admitted with no prior public offering (listing); and 23 joined the Alternative Securities Market (MAB), of which 17 as REITs by means of a listing, and 6 in the growth companies segment on five public subscription offerings and one public sale offering. Total funds brought in stood at EUR 1,426 million.
The proceeds of 123 share capital increases in the course of the year totalled EUR 23,154 million, down by 22% against 2015, a year which saw the second largest volume of this century. The number of capital increases carried out to pay dividends continued to fall against the previous year, now accounting for just over one fifth.
There was little activity in relation to takeover bids, after an extremely intense 2015. Four bids were carried through successfully, and late in the year an announcement was made which would appear to be relevant in 2017: the listed technology consultant Indra Sistemas intends to launch a non-hostile bid for 100% of the shares of technology firm Tecnocom, also a listed entity.
After a severe crisis which had a huge effect on funding for the Spanish business framework, there have been clear signs in recent years that leading non-financial listed corporations are adopting the financial restructuring strategies recommended by most international financial bodies: more capital and less reliance on bank funding channels, leading to an increased weight of marketable debt instruments within their borrowing structure. A recent analysis conducted on the basis of the audited accounts of a homogeneous group of non-financial IBEX 35 companies showed that between 2010 and 2015 the shareholders' equity of this group rose by more than 15%, their bank debt fell by 40%, and debt in fixed-income issues increased by 23%.
Although the financing conditions of smaller businesses improved substantially as of 2014, they are still heavily reliant on banking credit, which increases their vulnerability during periods of credit restrictions. The range of solutions tabled to help reverse this situation is headed up by alternative funding via the Alternative Securities Market for Growth Companies ("MAB") or the Alternative Fixed-Income Market ("MARF").
Funding was intense in 2016 in the MAB Growth Companies segment. Capital increases raised EUR 219 million, double the amount brought in the previous year. The number of companies on the MAB segment for Growth Companies ("MAB EE") continued to increase in 2016 to stand at 39 at year-end. The six new additions were: Clerhp, Atrys Health, Voztelecom, Clever Global, Mondo TV Iberoamérica and Pangaea Oncology.
Meanwhile, the Alternative Fixed-Income Market ("MARF") completed its third year, successfully achieving the objective for which it was originally created: to help fund Spanish companies as a new source of finance along with bank loans through issues of promissory notes, ordinary bonds and project bonds. Once these have been issued, they are admitted for trading on the market platform, offering transparency and liquidity and guaranteeing best order execution. Following the additions in 2016, a total of 29 companies have now obtained funding on the Alternative Fixed-Income Market operated by BME since it was created in 2013, in addition to 100 businesses that have secured funds by securitising their credit claims and invoices in securitised bonds.
In 2016 overall, issues and admissions for trading on the MARF market totalled almost EUR 2,300 million, a 174% increase on the previous year, and 4.6 times the volumes observed in 2014, the first complete year of operations by BME's Alternative Fixed-Income Market. The outstanding balance on corporate debt issues finished the year at EUR 1,612 million, up by 56% against the previous year-end.
The decline in trading volumes with regard to equity products was also observed in other listed products, most of which have shares as underlyings. Effective trading in Exchange Traded Funds or ETFs fell by 52% during the year, to 6,040 million, whilst the number of warrants fell by 28%. In recent years other types of warrants have entered this market, such as multi warrants, discount warrants, stay-high or stay-low warrants, introducing new and occasionally sophisticated investment techniques available to all kinds of investors, and especially individual investors. Issues outstanding at year-end 2016 totalled 3,999, still steady against previous years.
ECB intervention on the debt purchase programme brought rates of interest on Spanish issues to record lows, and in fact they were in negative territory for most of the year in the case of issues with maturities up to three years. Issues with longer maturities also showed lower rates, with 10Y and 30Y bonds fetching average rates of 1.54% and 2.569% respectively. Thus the Spanish Treasury has consolidated a significant reduction in financing costs, with a positive effect on public accounts enabling funds to be allocated to other priority spending areas.
Interest rates for 10Y Spanish government bonds hit a record low of 0.90% in October, in the wake of major volatility episodes. Subsequently Spanish bonds also participated in the worldwide upward trend in 10Y yields, climbing by 0.50 percentage points to make 1.40% by year-end. An increase in the volatility of the risk premium was also observed, although its level did not increase: 119 basis points at year-end, quite close to the 114 basis points observed at the beginning of 2016.
To a large extent, corporate debt mirrored developments in public debt in terms of interest rates: a downward trend in yields during the first part of the year, strong volatility in the post-Brexit days, and a steady rise subsequently. In 2016 the AIAF Market continued the process to reduce the amount of outstanding issues which began four years ago, albeit at a much slower pace. The Securitisations segment in fact, returned to growth, chiefly due to the banks' need to reduce the size of their balance sheets. AIAF trading data indicate a considerable fall in business, with a total effective exchange volume during the year of almost EUR 173,000 million, one third of the volume of corporate debt securities traded in 2015.
Also in connection with corporate debt, as already mentioned, the Alternative Fixed Income Market (MARF) has consolidated itself as a financing channel for all types of companies, especially medium-sized businesses.
Trading of public debt on BME's SENAF platform used by leading operators and market makers, increased in 2016 to just under EUR 175,000 million, up by 61% against the previous year.
More than 45 million contracts were traded in 2016 on MEFF, BME's Options and Futures market, down by 5% against the previous year in keeping with the dip in transactions on the world's main markets handling equity derivatives. The average implied volatility remained at practically the same levels as 2015.
Throughout 2016 the product portfolio was expanded to include trading in futures contracts on the new sectoral indexes, IBEX 35 Banks and IBEX 35 Energy. In 2016 new weekly maturity dates were also added to the existing stock option contracts, and seven new underlyings were admitted.
Although activity was rather more limited, contracts in relation to dividend payments by the main Bolsa players were again traded on the MEFF market in 2016. Trading in IBEX 35 Impacto Dividendo futures rose by 79% with 58,000 contracts, while share dividend futures also moved up 26% to almost 370,000 contracts.
As a central counterparty of the Spanish stock market, through Power BME CLEARING provides clearing services for electricity derivatives on the MEFF, and this continued to attract the interest of many companies operating in the sector. The number of participants rose by 16%, from 108 at year-end 2015 to 126 at the end of 2016.
The volume registered for the year was 24.1 TWh, which represents a 4% increase in the volume registered the previous year. The open interest was 9.1 TWh at the end of 2016, 7% more than the previous year.
Wind power producers and consumers have had access to derivatives since December 2016, enabling them to take up long-term positions in this market.
The central counterparty services provided by BME CLEARING also include REPO, which offers a central counterparty service for public debt repos, thereby eliminating counterparty risk for participants. In 2016, the registered monthly average was close to EUR 34,169 million over a monthly average of 444 transactions.
REPO has 29 participants, and the open interest financed at year-end was EUR 17,415 million.
The SWAPS/IRS segment is BME CLEARING's central counterparty service for interest rate derivatives traded outside organised markets (OTC). It commenced its activity in 2016, with an initial operation in January followed by a total volume of EUR 4,738 million, with a registered monthly average of EUR 395 million. The open interest has been gradually increasing, reaching EUR 1,656 million by year-end, and the segment already has 9 participants.
The EU "clearing obligation" obliges or has recently obliged (in 2016 or 2017, depending on the type of company) financial institutions, insurance companies and other non-financial companies to use a central counterparty to clear all interest rate derivatives with certain characteristics.
Following the introduction of the obligation stipulated in the EMIR Regulation to report derivative transactions on all types of financial assets, for almost two years European companies have been reporting derivative operations to the so-called repositories authorised by EMIR.
REGIS-TR is the European trade repository run jointly by BME and the German stock exchange, and in 2016 it was consolidated as Europe's second largest, processing almost 20 million messages a day. REGIS-TR now provides information for over 30 European regulators, consolidating its position as a communication channel for market participants and supervisors.
After several years of new domestic legislation, very little was produced in Spain in 2016 due to repetition of the general elections in June and the fact that the country had a caretaker government for most of the year.
The main legislatory initiatives in 2016 emerged when the new Spanish government had been created. In September advance corporation tax payments in instalments were introduced, along with a minimum payment of 23% (25% for financial institutions), for companies producing revenue of more than EUR 10 million. Two months later in December, further tax measures were approved in a bid to meet the fiscal consolidation target. These included a limitation on corporation tax deductions, higher special taxes and other fiscal and social measures.
Concerning the European capital markets, following the approval in July 2014 of Directive 2014/65/EU on markets in financial instruments, known as MIFID II, and Regulation 600/2014 or MIFIR, in 2015 and 2016 the European Securities and Markets Authority (ESMA) published a large number of technical standards for regulation and implementation, addressing a number of provisions of MIFID II and MIFIR. In July 2016 the Council of the European Union decided to postpone application of MIFID II and MIFIR until 3 January 2018, in view of the technical complexity of implementing them for the parties affected.
Whereas in 2015 the European Commission began its project to create the Capital Markets Union (CMU), in 2016 it strove to speed up reforms to introduce the CMU, with three types of measures: urgent completion of the initial measures proposed in the action plan, acceleration of the next phase of future legislative proposals for CMU, and the implementation of new priorities to be taken into account by the latest economic and technological developments such as, for example, rapid growth of FinTech.
Also in connection with the CMU project, a review was conducted in 2016 of prospectuses (Prospectus Directive), in an attempt to simplify information and provide access to funding for small and medium-sized companies.
Progress was made in 2016 on the production of legislation on Market Abuse in securities markets, and new rules were tabled for the restructuring and resolution of Central Counterparties.
Another important piece of legislation concerns PRIIPS (Packaged Retail and Insurance-based Investment Products), a basic regulation to improve the quality of information furnished to customers taking up financial products. This regulation introduces a standardised format, known as the Key Information Document (KID), which has been devised to provide a summary of the main characteristics of an investment product that is simple and accessible to consumers. On 9 November 2016, the European Commission announced that the date of application of this regulation had been put back to the beginning of 2018, in order to ensure smooth implementation for consumers, and to guarantee legal certainty within the sector.
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