2017, both economically and financially, has been one of the best of the last decade troubled by the profound global economic and financial crisis which began in 2007 and by the severe episodes of the sovereign debt crisis in Europe a few years later. The global stock markets have very positively welcomed the improvement in global economic growth as well as the outlook for the next few years, meanwhile, the bond markets have maintained an unexpected stability bearing in mind the gradual change towards more restrictive monetary policies by the main central banks. This behaviour has had a lot to do with the smoothing of the inflationary expectations that have removed pressure from the monetary authorities and interest rates over the long term. The stock and bond markets have been characterised by record low volatility levels, which has fuelled confidence.
Contrary to recent years, the main international organisations have revised global growth upwards on several occasions: the latest forecasts for the year from the IMF indicated an increase in global GDP of 3.6% for 2017 and 3.7% for 2018, following the 3.2% recorded in 2016. This rise accompanies an annual increase in the global trade volume rate, which has almost doubled to 4.2% in 2017 compared to that of 2016, and willremain at around 4% in 2018. The European economy has been one of the positive surprises of the year, accelerating its momentum to place the estimated GDP growth for 2017 a few tenths of a percent above 2%, the best figure for the last five years, driven by the good indicators of the German and Spanish economies, but also by the improvement in France and Italy. This good performance has also been mirrored by the Euro, which has gained almost 17% against the dollar.
Ten years on since the beginning of the crisis, the monetary authorities of the main global economic areas continue to play an extremely important role. The North American Federal Reserve has accelerated the return to normality of the monetary policy after three increments of 0.25 percentage points each in April, June, and December, until reaching a level of 1.5% with the intervention rates. In addition, it began to reduce its balance by abandoning reinvestment of the maturing debt. With regard to the European Central Bank, throughout the year it has maintained the expansive tone of its monetary policy with intervention rates of 0% and the fully functioning quantitative easing programme (QE), but in the last quarter it has begun to specify the normalisation process of its monetary policy: debt purchases will reduce as of January 2018. The reluctance of the ECB to reduce the stimulus more aggressively has been reinforced by the gains of the euro against the dollar and the containment of inflation both in Europe in general and in the other developed countries.
For the third year running, the Spanish economy did well in the international arena with an estimated GDP growth of over 3% in 2017, placing it at the forefront of the world's major developed countries. In spite of the political situation generated in the second half of the year due to the Catalan issue; factors such as a more positive global setting, the intense creation of jobs, low interest rates, and even the reduction of private sector debt have once again fostered very good behaviour in consumer spending, exports and also investment. However, the Spanish economy still has aspects that make it vulnerable: high unemployment, a public deficit that is still high, the weight of sovereign debt, the dependence on foreign financing and political complications.
The IBEX 35, the main index of the Spanish stock exchange, was back in the black in 2017 and up until the beginning of December had accumulated a gain of close to 10%. Taking dividends into account, profitability is around 13%. This year has had two diametrically opposite parts for the main indicator of the Spanish market, up until May it had accumulated an increase of 19% and then lost 11% of this ground, due to the political uncertainty generated in Catalonia, as well as other factors.
Up until 4 December 2017, the global Exchanges accumulated strong gains which for the main global indexes varied between 19.1% and 14.9%, with several record highs being set throughout the year. For the entire previous year, the global aggregate indicators had closed with lower gains, around 6%.
The European exchanges have accumulated positive gains on a generalised basis, but with a significant dispersion. The EuroStoxx 50 reference for the Eurozone rose 8.7%. Below this is the Stock Exchange with the worst performance for the year, United Kingdom, with an increase of 2.7%, halted by the consequences of Brexit. Above the EuroStoxx indicator, Austria (+28.4%), Norway (+18.7%), Portugal (+18.2%), Italy (+16.3%), Greece (+15.3%) and Switzerland (+13.5%) are in the group that have performed best, whereas in the case of Belgium (+10.9%), France (+10.8%), Germany (+10.7%) and the IBEX 35 from the Spanish stock exchange (+9.2%) the gains were not as brilliant.
Once again this year, the US markets demonstrated great sturdiness sustained by a weaker dollar and the good performance of the global and North American economies and in spite of the restrictive trend that the Federal Reserve's monetary policy has adopted. Their main indices up until the beginning of December reached yields above the global average: the Dow Jones rose 22.9%, the S&P 500 17.9% and the NASDAQ 100 index with a noticeable component of new technologies, by 28.8%, completing and impressive run of nine consecutive years of gains. All the main North American indices have repeatedly reached record highs during the year and yet again on 4 December. Also within the developed markets, the Japanese Nikkei index also recorded an excellent year, with an increase of 18.8%.
The returns of the global stock exchanges acquire more value if taken into account that these have occurred within the context of decreased volatility, in many cases at record levels.
Trading on the Spanish Exchange in 2017 followed a continuous trend compared to the previous year. The volume traded up until November reached the amount of €603.806 billion, with improvements particularly from May. The number of share trades executed up until November was 48 million, slightly below the 50 million recorded up until November 2016 and remains at very high levels after the record highs of 2014 and 2015.
In an environment of growing competition, the Spanish Exchange maintains an extremely high level of liquidity for the shares traded on the market and the spreads and depth that its trading system offers to traded securities are benchmarks, and with only a few weeks until the entry into force of the MiFID II Regulations, which strengthens the requirements of financial intermediaries on the best execution of the orders on Spanish securities. In 2017, the average spreads of all the securities included in the IBEX 35, the IBEX Medium Cap and the IBEX Small Cap have continued to narrow. For the IBEX 35 securities this fell by 5.2 basis points, 1 bp less than a year ago. With regard to the IBEX Medium Cap, in November this had a spread of 24 basis points, also close to the lowest in a decade and 5 bp lower than that of a year ago.
Up until November 2017, there were three Spanish securities positioned amongst the 10 most heavily traded in the Eurozone and two others that were positioned 20th and 24th. In other words, 10% of the Eurostoxx 50 securities are Spanish and all of them are in the first half of the table in terms of effective trading with a total weight of 14% of the total traded for all the securities of this indicator.
The capacity to channel new investment and financing, one of the strong points of the Spanish Exchange, reached exceptional levels in 2017. Up until November the total of new investment flows and financing channelled through the incorporation of shares originating from capital increases, new admissions to trading and share offers and IPOs nearly reached €39 billion, 44% more than the previous year. The forecasts for the close of the year indicate figures exceeding 40 billion, the first or second best year of the last 10 in terms of financing.
Share offers closed a great year around the world and in Spain. The positive behaviour in terms of yield and risk have fuelled the placement of listings on the stock exchange, which will more than likely close the best global year since 2007, according to the EY Global IPO Trends Report. During the period January-September 2017, the number of global placement operations had already exceeded that for 2016, and the volume placed has grown 55% to 1,156, compared to the same period in 2016.
Up until December 2017, 23 companies had joined the Spanish stock exchange bringing in funds from these operations of nearly €4.3 billion, three times the funds brought in during the same period of the previous year. Of the companies admitted to trading, five did so on the stock exchange through four share offerings and three IPOs, bringing in €4.018 billion. The rest did so on the MAB: Three in the Growth Companies (GC) segment through three IPOs for a total of €22 million and 15 in the REITs segment, through twelve listings and two IPOs, for a combined total of €272 million.
With the comparative data at the close of the third quarter, the Spanish Exchange is the leader share offers in the Eurozone. The admission to trading of Gestamp, Prosegur Cash, Unicaja Banco and Neinor Homes are amongst the most significant of the year at a European level and in particular the Gestamp share offer is the third most significant of the continent in the first half of the year.
Up until November and through 98 capital increase transactions, listed companies brought in resources during the year for the amount of €29.477 billion, 31.18% more than that obtained during the same period in 2016. Two large transactions for amounts exceeding €7 billion have become global benchmarks in the wind and banking sectors: the capital increase of Gamesa to assist with its merger with the Siemens' wind business and that performed by Banco Santander to cover the award of 100% of the share capital of Banco Popular Español, after the intervention of the European banking authorities.
The activity related to takeover bids has dropped in terms of number of operations, but is still very significant due to the volume of the operations, in some cases yet to be specified. Five public offerings have been presented, two successfully completed and three pending amongst which are those relating to the toll road operator Abertis.
The trend towards a greater diversification of business financing in Spain is becoming more evident and much accelerated in the case of the main listed companies. The Bank of Spain covers this in its annual report: "there is a process of disintermediation underway in the financing of Spanish companies. Although it is a global phenomenon, its intensity has been somewhat noticeable in Spain, where the extent to which finance is obtained through banks has traditionally been greater than in other neighbouring economies ". Recent analyses carried out on the audited accounts of Spanish non-financial listed companies that formed part of the IBEX 35 between 2010 and 2016, shows that equity rose by 24%, while bank financing fell by 42%, well below the volume of financing originating in Fixed Income instruments, which grew by 30%, according to this analysis prepared from the audited accounts of the companies. In summary, more capital, less debt and more debt diversification
The capitalisation of the companies admitted to trading on the markets operated by BME at the close of November 2017 stood at €1.15 trillion, 13% more than at the close of 2016. Of this amount, €751 billion corresponded to national listed companies the market value of which was €82 billion higher than at the close of 2016. More than 400 billion below the lowest levels recorded of the crisis in 2012. A significant part of this increase is not only due to prices, but also to the new shares admitted both from new admissions as well as capital increases carried out through the market by already listed companies.
The number of companies admitted to trading in all the segments of the Spanish Exchange at the close of November totalled 3,153 companies.
Foreign investors continue to place their trust in the Spanish Exchange and do so setting records for ownership of Spanish listed shares with more than 45% of the total value, according to the provisional data at the close of June 2017. Furthermore, in terms of activity they continue to remain present in more than three quarters of the total traded volume.
With regard to Spanish families, their equity or net financial wealth once again hit a new record high at the close of the first half of 2017, almost touching €1.37 trillion, 4.5% more than at the close of 2016. Since 2008 net wealth has increased by more than €640 billion, this becoming in recent years a critical pillar of the recovery for the Spanish economy. The increase and gains of the equity portfolio and holdings in investment funds are largely responsible for this positive behaviour.
Spanish investment funds in 2017 totalled five consecutive years of growth and up until October their equity increased 11% to €260.70 billion, a level that exceeds the record highs prior to the crisis. In these five years the equity has increased by more than €138 billion. Of particular significance is the growth in national equity funds, which grew 240% over the last five years. Of particular note in 2017 has been the increase in the number of participants in investment funds, which has increased by nearly 24%, reaching 10.2 million.
REITs or Real Estate Investment Trusts specialising in rentals continue to grow in number and market value providing investors with liquid investment vehicles linked to the real estate rental market. With 15 additions up until December 2017, 48 companies have now embraced the concept, which are listed in different segments of the Spanish stock market. 5 on the main floor, and 43 in the specialised segment of the Mercado Alternativo Bursátil (MAB).
Amongst the factors at both a national and international level that have sustained the elevated stock exchange returns, the strength of the company earnings is high on the list. During the first half of the year, the companies of the Spanish Exchange forming part of the IBEX 35 increased their operating income by 10%, their EBITDA by 9.4% and net profit by 19.4% compared to the same period of the previous year. The provisional data up until the third quarter maintains the general tone of improvement: 17.8% growth in revenue, EBITDA of 7% and a net profit of almost 18%.
The Spanish listed companies have also spearheaded the foreign expansion of the Spanish economy and according to the data for the first half of 2017, the total foreign revenue of companies on the Spanish Exchange reached a record high of over 67%.
Up until November 2017, the listed companies have distributed €25 billion to their shareholders in dividends, return of monetary contributions through share premiums and nominal reductions, down slightly by 2% compared to the same period of the previous year. The dividend yields of the Spanish exchange, 4.1% in November, according to data from MSCI, remains in the top positions amongst the developed stock markets and has consistently exceeded 4% for more than 10 years.
ECB intervention through the purchase of a sovereign and corporate debt has continued to keep the interest rates on Spanish issues at record lows and conditioning Fixed Income markets, the trading activity of which has fallen. With regard to the Spanish Treasury, the monetary policy of the Eurozone has meant a fall in financing costs over the last two years, with a favourable effect on the State's accounts which has allowed it to allocate resources to other priority expenditure.
In line with the global market principles on sovereign debt, the Spanish ten-year bond has registered a reduced volatility and rates contained within a range of between 1.32% and 1.89%. The risk premium compared to the German reference bond started the year at 114 points and returned to similar levels at the beginning of December with occasional stress periods, particularly in October, deriving from the Catalan political crisis.
Corporate Debt has also experienced a year characterised by the drop in the yield on high-grade bonds, driven by the ECB's corporate sector purchase program (CSPP), which reached an average monthly volume of around €7.5 billion.
The BME Equity Market saw the balance of corporate debt fall slightly by 4.5%, sustained by the increase of almost 38% in the issue of bonds and debentures and, in particular, penalised by the reduction in the issue of securitised bonds. Also in connection with corporate debt, as already mentioned, the Mercado Alternativo Bursátil (MARF) has consolidated itself as a financing channel for all types of companies, especially medium-sized businesses.
Although the financing conditions of smaller businesses has continued to improve in 2017, they are still heavily reliant on bank 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 Mercado Alternativo BursátilMAB or the Mercado Alternativo de Renta Fija MARF.
The MAB Growth Companies segment has continued to consolidate its financing potential throughout 2017. Capital increases up to November have reached €110 million and the number of companies in the market has continued to increase to stand at 41 after the inclusion of three new companies: Asturiana de Laminados, Netex and now in December, Greenalia.
The MARFwith barely 4 years under its belt continues to successfully achieve the objective for which it was originally created: to contribute to the funding of Spanish companies by providing a new source of finance complementary to bank loans through different types of Fixed Income issues: ordinary bonds, commercial paper and project bonds. Once these have been issued, they are admitted for trading on the market admission and trading platform, which offers transparency and guarantees the best order execution. With the additions from the 2017, there is now a total of 40 companies who have been directly financed on the BME operated MARFsince its creation in 2013.
Overall, between January and November 2017, the volume of issues and admissions to trading in the MARF reached 3.754 billion, comfortably surpassing the 2.3 billion for all of 2016. The outstanding balance of corporate debt issues in November was around €2.480 billion, growing 35% compared to the same date for the previous year.
In an setting of a greatly reduced volatility, global trading activity has remained stable in 2017 in the global derivatives markets: In MEFF, the market for Options and Futures operated by BME, up until November there were 38.74 million trades in futures and options in underlyings related to Equity, indices and shares, practically the same as for the same period the previous year. The average implied volatility of the options on IBEX 35 was 14.9%, almost 9 points below the average figure for 2015 and 2016, and also the record average since 1995.
Trading up until November in the main product of the MEFF, IBEX 35 futures contracts, was down by 9% compared to the same period of the previous year, in keeping with the generalised fall in trading in most futures on other European stock markets. Meanwhile, trades in IBEX 35 options increased 32%, futures on individual shares by 21% and options whose underlyings are Spanish individual shares were down slightly by 4.7%, but maintaining a market share of 77% compared to competing markets such as EUREX.
With regard to futures contracts in electrical energy (Swaps and Futures) which are also admitted and traded on the MEFF and which both permit the hedging of the risk of movements in the prices of electricity as well as attempt to anticipate its movements, in 2017 there was a notable increase in the number of participants in the market, with up to 146 entities at the end of November 2017 (+17%). The volume traded was 16.6 TWh representing a drop of 25% compared to the same period from the previous year, in line with the low volume of transactions in all the markets relating to Spanish electrical energy.
For sovereign debt transactions with a repurchase agreement (REPO) arranged bilaterally, the clearinghouse BME Clearing offers registry and central counterparty services. Up until November, the total volume registered reached €277.08 billion, with a monthly average of 411 transactions. Currently, the REPO service has 28 settlement participants: 26 are Spanish and two are from outside Spain. Furthermore, the number of participants has increased due to the new access to institutional clients: a total of sixteen clients were included in September. The financed open position, i.e., the average outstanding balance of non-expired transactions, equivalent to the facilitated financing, was €17.639 billion at the close of November, with an average financed term of 42 days.
With the entry into force of the obligation to report on the derivatives transactions on all manner of financial assets to a centralised registry accessible by all the regulators, as provided for in the European EMIR regulation, European entities have been reporting derivative transactions to the so-called European trade repositories.
REGIS-TR is the Europeantrade repository developed jointly by BME and the German Stock Exchange which in 2017 consolidated itself as the second biggest repository in Europe, with more than 1,400 open client accounts, receiving and processing more than 823 million messages in the first three quarters of 2017, the year in which it has also been authorised to provide reporting services under Swiss regulations. REGIS-TR now provides information for almost all European regulators, consolidating its position as a communication channel for market participants and supervisors.
The European capital markets will be subject to important modifications with the entry into force on 3 January 2018 of Directive 2014/65/EU on markets in financial instruments, known as MIFID II, and Regulation 600/2014 or MiFIR. 2017 has been characterised by the intense preparatory activity, both by the markets as well as the intermediaries and other participants in capital markets.
MiFID II reforms and expands the scope of the previous directive and represents a supplementary strengthening of investor protection, the application of European standards to new financial products and services and the extension of the requirements applicable to investment service companies, regulated markets, data reporting service providers and companies from third countries that provide services or perform investment activities in the European Union. The magnitude of the change resulting from this new regulation has resulted in the drafting of a new Spanish Securities Market law, the bill for which as at the end of 2017, is going through Parliament.
With regard the market activity, MiFID II entails a strengthening of the requirements for transparency, establishing limits to specific waivers to pre-trade transparency and refining other types of waivers with the aim of encouraging trading in the order books of the regulated markets and MTFs in which the price-setting processes are efficiently performed. These new requirements limit the waivers to those types of trades or trading mechanisms which do not contribute to the price formation process and therefore do not remove liquidity from the transparent order books.
They also establish, within technology intensive trading venues, requirements that contribute to encouraging an orderly functioning of the markets. In this regard, they regulate aspects such as algorithmic and high-frequency trading or the direct access to or sponsoring of the market, activities which must also be identified for their proper supervision. The purpose of the market creation processes is for these types of activities to contribute effectively to the liquidity of those instruments to which they are applied.
The new regulation is demanding in terms of information with the dual purpose of establishing a competitive environment under equal conditions for all venues and intervening parties operating therein and to achieve sufficient protection for the investors through the application of the regulations governing market abuse. In this regard, standards are established for the communication of the relevant information on securities, reference data and liquidity data, as well as demanding requirements in terms of information to be provided to the competent authorities for the purposes of registering orders and reporting trades.
The Fixed Income markets will undergo highly significant changes when initially integrating the actions concerning transparency, execution and protection. A new pre-trade transparency process has been established for the order trading phase. The new directive establishes the obligation to make the trades and volumes on fixed income securities transparent before they are executed. The derivatives markets will also fall under the MiFID II regulation.
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