Foro Medcap: The Key Moments

Spain’s economy withstands the volatility

Attended by 110 companies and 130 institutional investors, of which 25% were based outside of the Spanish market, BME’s Foro Medcap Conference took place in Madrid between May 30 and June 1, barely days after the government announced snap elections and just a month before the country assumes the six-month rotating EU presidency. Markets have been dealt with multiple blows since 2020, first by the pandemic, and now the rampant inflation sparked by Russia’s invasion of Ukraine. Other crises and black swan events will surely follow. Amid the difficult macro environment, industry leaders at Foro Medcap discussed how Spain’s capital markets are responding to these challenges.
June 9, 2023

Rising inflation -  coupled with Central Bank monetary policy tightening -   has derailed the post-COVID global economic recovery. However, Spain appears to be weathering the storm.  “When the year started, there were concerns of a looming recession but Spain has circumnavigated the crisis well,” said Javier Hernani, CEO of BME.  According to forecasts by the European Commission (EC) , Spain’s Gross Domestic Product (GDP) is expected to grow by 1.9% in 2023 and 2% in 2024, [1] versus Germany whose GDP is projected to increase by just 0.2% in 2023 and 1.4% in 2024.[2]

Inflation in Spain is also amongst the lowest in the eurozone, hovering at around 2.9%, [3] a feat which the government believes is down to its decision to cap energy prices.

With the European Central Bank (ECB) poised to increase interest rates over the course of 2023, there are concerns this may cause Spain’s economy to cool. Rising rates could also make it harder for domestic companies to service their debts. Nonetheless, Ana Aguilar, Director and Chief Economist at Deloitte, noted that debt levels across the private sector in Spain are much lower than what they were in the run up to the financial crisis. She added the post-financial crisis deleveraging should  help ensure that Spanish companies are in a healthy position to counter any potential ECB rate rises.

Navigating longer-term headwinds
Longer-term, there are both challenges and opportunities facing Spain’s economy. Hernani said that despite the positive economic data, Spain’s GDP is yet to return to its  pre-pandemic levels, in contrast to a number of other countries.  

One of the main obstacles hampering Spain’s growth potential is that the market is hyper-regulated, said  Ismael Clemente, CEO of Merlin Properties, which in turn creates unnecessary bureaucracy and added costs for companies -  including SMEs.  “Many of these administrative costs are suffocating businesses. There are 17 autonomous regions in Spain, and the rules are different in each of these micro-markets, which makes it difficult for companies to launch and ultimately grow,” said Clemente.  

Spain’s productivity is also being severely stifled by its ageing population, a point made Aguilar. Data shows that Spain currently has one of the world’s most rapidly ageing populations, with 23% of people over the age of 65, while studies suggest the population could shrink by a third by 2100. [4] This demographic imbalance is creating  significant labour shortages across core sectors, including retail and hospitality, construction and technology.

If Spain’s economy is to thrive moving forward, however,  then it needs to play to its strengths. Aside from its membership of the EU, Alicia Coronil Jonsson, Economist at Singular Bank, said Spain has plenty of cultural capital and is well-connected to a number of burgeoning LATAM and African economies. She continued that Spanish is a global language, and the country needs to capitalise on this advantage so as to attract more inward investment.

Raising money in a tough market environment

 Owing to the turbulent market conditions, global Initial Public Offering (IPO) activity has been subdued over the last 18 months . Compounding the problem further is that more companies are choosing to stay private for longer, as many believe that going public is a costly and time-consuming exercise. IPO volumes in Spain have not bucked this wider global trend,  but experts believe the tide is slowly starting to turn.

 “Although there has been limited IPO activity, we are seeing some green shoots emerge. As long as the macro situation does not deteriorate over the summer, we could see  more companies try to tap into the public markets again,” said Javier Ferna´ndez-Galiano, Director at Deloitte.

 SMEs – hungry for capital -  are increasingly scoping out alternative trading venues such as BME Growth, a platform for promising growth companies.  Despite the difficult market headwinds, four companies have chosen to list on BME Growth this year.  Since its creation in 2009, BME Growth has incorporated 165 companies and executed 461 corporate capital raising operations which have raised €5.9 billion in new investment. It has 127 listed companies with a market value of more than €20 billion.  

 Ixone Vicente, CFO at Arteche – which went public on BME Growth in 2021 – said listing enabled the company to access new financing sources, allowing it to expand the business further. Being publicly traded also gives SMEs greater visibility – and with it liquidity -  a point made by Luis Cid, CEO of OPDEnergy, which listed on BME Main Market in 2022.

 Regulators are also developing frameworks to make it easier for EU SMEs to tap into the capital markets. First announced in 2015, the Capital Markets Union (CMU) contains a number of provisions designed to eliminate some of the barriers facing SMEs when accessing public market financing. Tatyana Panova, Head of Unit, CMU, DG FISMA, at the EC highlighted that the Listing Act, a provision contained within  the CMU, would streamline the listing and post-listing rules for companies, in what should incentivise more SMEs to go public.

Unlike the US, retail investor participation in capital markets is somewhat limited, and this is something regulators are trying to remedy. Panova said consumers in the EU typically hold their savings in bank deposits, and eschew capital markets, as they view them as being risky and complex. Panova continued it is vital that the authorities work towards improving financial literacy among ordinary consumers, so as to encourage greater retail investment into the capital markets.

 Diversification of funding is non-negotiable

In comparison to North America, European SMEs are less likely to tap into capital markets preferring instead to obtain their funding from traditional bank sources. Relative to corporates  elsewhere in the EU, Panova said  Spanish companies are even less likely to finance themselves through the capital markets, and instead rely mostly on bank loans.  However, recent volatility has stoked fears that bank financing could dry up, in what would have a devastating impact on EU (and Spanish) SMEs.

Raquel Arechabala, Investment and Business Director at Norbolsa, said that although European banks are better capitalised now than in 2008, the collapse of several US regional banks together with Credit Suisse, has increased the chances of a credit crunch materialising, before stressing it was important that SMEs have diversified funding sources.

Within Spain, a number of SMEs are looking to obtain funding via MARF, an alternative fixed income market. Arechabala pointed out that MARF emerged out of the 2008 banking crisis, as SMEs looked to broaden their funding sources at a time when bank loans had all but disappeared. Since inception, more than 135 issuers have listed on MARF

Companies drive ahead with sustainability

With the EU looking to reduce its reliance on fossil fuels, appetite for renewable energy sources is set to spike, in what is likely to be an excellent opportunity for Spain. Spain is fast cementing itself as an EU leader for renewables – most notably solar power – with the country expected to install 19 GW of new capacity between 2022 and 2025. [5] Jose Carlos Diez, Professor at the University of Alcala , added Spain is also in the early stages of developing green hydrogen, in what could one day become a major source of renewable energy.

SMEs need to think carefully about how they incorporate sustainability into their business models. This comes as investors – both retail and institutional – increasingly demand that companies demonstrate that they are taking environmental, social, governance (ESG) matters seriously.

Jose´ A´ngel Fuentes , Fixed Income Manager at Mutuactivos , said the asset manager has historically focused on governance, but is now increasingly scrutinising environmental and social metrics at issuers.  Iciar Puell Go´mez de Salazar, Managing Director, Equities, for Spain at Caixabank AM , said the firm adopts an activist approach when engaging with companies on ESG matters. If companies are perceived to be weak on ESG, then they will struggle to attract capital from investors.  

However, investors do need to recognise that brown companies – such as oil and gas or steel manufacturers -  will still need funding if they are to successfully transition to net zero as well.

Regulations in the EU are also demanding that asset managers and corporate issuers provide more information about their sustainability . Adolfo Este´vez, Managing Director at Ethifinance Ratings, said the EU’s Sustainable Finance Disclosure Regulation (SFDR) will apply to fund managers, and obliges them to be wholly transparent about the sustainability impacts of their investments. Este´vez said these sustainability disclosure requirements  will help investors  when making their  asset allocations.

 Chasms emerge in the ESG movement

ESG and sustainable investing do face a number of challenges. Firstly,  EU regulations with overlapping objectives have been introduced , but not at the same time, and this has created confusion. A prime example here is the Corporate Sustainability Reporting Directive (CSRD) – which imposes sustainable reporting requirements on small, mid and large cap companies in the EU, versus the SFDR.

Este´vez  highlighted there have been complications insofar as SFDR – which requires asset managers to collect sustainability data from issuers – was introduced  ahead of CSRD.  In other words, the ESG disclosure provisions for issuers – which should form the basis of asset managers’ own ESG reports under SFDR – were not ready when SFDR was live.

Although rules are necessary to encourage positive ESG behaviour, there is a risk  that the EU is over-regulating the market. Este´vez  highlighted a handful of EU political leaders have publicly warned that prescriptive ESG rules could put European businesses at a competitive disadvantage relative to their global peers. He continued that some US politicians are increasingly positioning themselves as being anti-ESG, and banning – or severely restricting – public sector pension funds from having investments in ESG assets.

The lack of standardisation around ESG data is another major impediment, and one that increases the risk of greenwashing by investors and issuers, a point made by Anais Labigne, Senior Associate Client Relations at Morningstar Sustainalytics. “In a world where there is a lot of disparity around ESG data, some investors may use the ESG data which is most convenient for them to highlight their ESG credentials,” added Este´vez .  Although efforts are underway to bring about better standardisation of ESG data, these initiatives are still in their early stages.

Greenwashing is perhaps most synonymous with companies responsible – either directly or indirectly – for  large-scale fossil fuel emissions, but it is also a problem facing renewables, according to Alberto Go´mez Reino, Sustainable Investment and Asset Allocation at BBVA. Take electric vehicles (EVs), for example. Although EVs emit less C02 than traditional diesel or petrol vehicles, the batteries powering these cars rely on precious metals, which are often mined in an energy intensive fashion .  In some cases, the working conditions at these mines may fall short of international  labour standards too.

A digital strategy is non-negotiable

Companies – including Spanish SMEs – are under no illusion that if they are to be successful in the future, they will need to embrace digital transformation. Conscious of the importance of digitalisation and innovation,  Spanish companies are increasingly building up their exposures to the technology sector, with Clemente highlighting that  Merlin Properties is now a major investor in data centres, a market segment which has historically been dominated by US firms.

SMEs are also integrating technology into their day to day  operations, as they look to deliver better customer service and obtain cost synergies. Pablo Martin, President and CEO at Izertis, said technologies that were previously only available to the largest companies, are now more widely accessible. “Technology used to be very expensive, but now it is a lot cheaper, and this means it can be used by small companies as well as major corporations,” said Martin.  

Recent innovations – including generative AI (artificial intelligence) tools such as Chat GPT – will  likely provide a major productivity boost for SMEs.  Constantino Fernandez, President of Altia, said the technology could, for instance, help companies develop software code more quickly, and at lower cost. 

A failure – or unwillingness – to adapt opens companies up to the risk of disintermediation. Martin cited Kodak as an example of a company, which failed to evolve with the times, namely by  its steadfast refusal to accept that digital cameras would eventually usurp film-based cameras. ”Although Kodak was a wonderful company, it did not anticipate the changes which lay ahead, and it ultimately disappeared,” said Martin.

 Green shoots start to emerge

 After a tumultuous 18 months, there is sense of optimism that markets will stabilise fairly shortly. As and when they do, IPO activity will likely recover. For SMEs to flourish in this environment, they need to think carefully about how they finance themselves. Moreover, organisations should not underestimate the importance of having an ESG and digital strategy, if they are to win over investors.

[1] European Commission – Economic forecast for Spain
[2] European Commission – Economic forecast for Germany
[3] Financial Times – May 30, 2023 – Inflation in Spain falls more than expected to 2.9%
[4] Bloomberg – August 11, 2022 – Ageing Spain issues rallying call for workers from Latin America
[5] Reuters -  December 8, 2022 – Spain’s bulging solar pipeline heaps pressure on permitting

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