Fact Book 2018. Summary of the year.

2018 has been a difficult and very complex year for the international financial markets and for investors, during which time the prices of the vast majority of the financial assets around the world have closed the year with losses. The moderate slowdown of the global economy has coincided with instability factors with a potentially significant impact, such as the increase in protectionism and trade disputes, the increase in populist political movements, the Brexit negotiations, the fall in commodity prices, the virulent episodes of monetary crises in emerging countries such as Turkey and Argentina, and the increase in government and private debt in aggregate global terms. Throughout the course of the year, the main international bodies have revised their annual global growth forecasts downwards, the last one being the OECD in November, dropping down to 3.5%, four decimal points lower than in May. The Eurozone economy has been one of the biggest negative surprises with it growth slowing down to levels below 2%, hampered by the worse than expected performance of the German and Italian economies in the second half of the year.

More than a decade after the start of the global financial crisis, the Monetary Authorities of the main global economic areas continue to play very significant roles and in 2018, the divergence between Europe and the United States remains evident. The FED maintained an openly restrictive tone and increased interest rates four times during the year by 0.25%, with the last one in December setting the rate at 2.50%. The European Central Bank (ECB) began to moderate its expansive monetary policy and although interest rates remained at 0%, the purchase of government and private debt gradually reduced from January until disappearing at the close of December. As of the beginning of 2019, only the reinvestment of debt maturities shall be maintained. The expectations of an increase in interest rates by the ECB decreased and at the close of 2018 none were forecast until 2020.

In Spain, in 2018 the economy entered into a more mature phase of the cycle as a result of the progressive waning of the favourable "tail winds" and the impact of the aforementioned risks, specifically the global and European downturn and the crisis in some emerging economies. Two motors of the Spanish economy saw themselves weakened: consumption, due to the progressive waning of cross demand and other factors, and exports due to the lower European and emerging dynamism. Both the Banco de España and the European Commission and the OECD revised their forecasts downwards and in the last moments of 2018 they concurred on a growth of 2.6% for 2018 and 2.2% for 2019. By sectors, they revised consumption and exports downwards, whereas they revised investment in both the construction and capital and non-material goods sectors upwards.

International Indices and Stock Markets

The main global stock market indices closed 2018 with substantial accumulated losses, ranging from between -9.1% and -10.7%, in contrast to the large gains of around 20% in the previous year. December saw the sharpest falls in stock market price indicators.

The European and the Spanish Stock Exchanges in particular accumulated losses that exceed those suffered globally, 15% for the IBEX 35, the main index of the Spanish stock exchange, and 14.3% for the pan-European EuroSTOXX50 indicator. Taking dividends into account, the loss of the IBEX 35 is brought down to 11.5%. The negative performance of the European banking sector (-28.5%), with a heavy weighting on the stock exchange, has dragged down the general indicators of the whole continent, which also have also fallen significantly in markets such as France (-10.9%), Italy (16.5%) or Germany (-18.3%). The North American markets have also recorded losses, but not as severe as those in Europe. the Dow Jones fell by 5.6%, the more extensive S&P 500 by 6.3% and the Nasdaq 100, the tech index, by 1%.  The year was not been favourable for the emerging markets either (-15%), with exception to Brazil, whose index rose by 15%, the best global data from among the significant markets.

Investment in Spanish shares: capitalisation, trading, liquidity and dividend yield

The share prices in the Spanish Stock Exchange in 2018 were negatively affected by situational factors and some of more structural components. Firstly is the lower economic dynamism of the domestic economy and that of the Eurozone. And also to some extent the political instability arising from the change of Government. From a more structural perspective, the excessive weight of the banking sector in the Spanish market was a negative influence due to its index falling 29%, in line with the financial securities around the world. Although this was not so for subsectors more closely related to energy, research and new technologies such as electricity and gas (8.9%), the chemical industry (8.8%) or renewable energies (9.6%).

Spanish stock market capitalisation remained at just below one trillion euros, 999 billion euros, at the close of 2018.

The number of companies admitted to trading in all segments totalled 3,007 companies, 129 fewer than at the close of the previous year, mainly due to the reduction in the number of SICAVs by 154, most of which were dissolved and added to investment funds.

Both the uncertainties and negative trends in price listings affected the volume of shares traded on the Spanish stock exchange which reached 587.507 billion euros and 44.22 million trades, registering respective falls of 9.8% and 13.2%. The year was marked by new operational developments to adapt to the new competitive environment created by the full entry into force of the MiFID II regulations. The reduced volatility continued to be very prevalent on the Spanish Stock Exchange, with the VIBEX Index, the volatility indicator, remaining at record low levels (15.04%) throughout 2018, lower even that the previous year, but with an upward trend that began in June and accelerated in the last two months of the year.

The Spanish Stock Exchange's trading systems hold a very prominent position in terms of liquidity and market depth for the shares of the companies listed on its platform. In accordance with the spread between the best bid and ask price, the average of all the securities included in the reference indexes remained at an all time low. At the close of December 2018, the IBEX 35 had an average spread of 5.4 basis points (in hundredths of a percentage point), up barely three thousandths of a percentage point year-on-year, whereas the IBEX MEDIUM set a record low of 21 basis points in July. Spanish securities continue to prominently feature in the ranking of those most traded in the Eurozone. 10% of the securities of the EuroStoxx 50 Index are Spanish with a weight exceeding 9% for capitalisation and almost 12% for trading.

The Spanish Stock Exchange leads the developed markets in terms of shareholder returns in the form of dividends and other payments, this being one of the factors that most attracts private investors, as well as institutional, foreign and national. In 2018, the listed companies distributed nearly 30.105 billion euros to their shareholders in dividends, the return of monetary contributions through share premiums and nominal reductions. 6.6% more than the previous year. In accordance with the comparable international data published by the MSCI, at the close of 2018 the dividend yield of the Spanish Stock Exchange stood at 4.6%, placing it among the top five for this concept among the global developed markets, and making it the 11th year in a row above 4%, thus reflecting the recurrence of the payments of all the Spanish listed companies.

The internationalisation of the Spanish companies, of great significance in explaining the recovery from the Spanish economic crisis, is a process that has been particularly and intensely experienced by the companies listed on the Exchange: the amount of foreign revenue for all listed companies during the first half of 2018 was 67.68%, when 20 years ago it was barely 24% and 50% 10 years ago.

Products assignable to Equities, such as Exchange Traded Funds (ETFs) traded 3.025 billion euros in 2018, the 86,716 trades. These figures represent decreases of 32.2% and 11.8%, respectively, compared to 2017. The consolidation of an extensive, diversified and transparent market of funds listed on the Exchange or ETFs continues to be a pending subject in Spain due to several factors, among them being those of a financial nature. 

Warrants are also traded on the Spanish Stock Exchange. Their performance was also affected by the absence of volatility, the same as in 2017. Trading stood at 981 million warrants, 20% down on 2018, representing a cash volume of 283 million euros, up 0.35% year-on-year.  However, the number of admissions for the year was 4,983, 10% lower than those recorded for 2017. At the close of 2018, there were 2,428 warrant issues outstanding on the market.

Capital increases and IPOs

The investor base of the Spanish Stock Market remained extensive and diversified, with foreign investors making up the most important group with a 46% stake in the overall capital of the listed companies, according to the data at the close of 2017, representing a record high. Thanks to the confidence of the investors, the Spanish Exchange has traditionally been well positioned on the international stage in terms of corporate funding in the form of capital. Thus, since the year 2000 financing flows and investments with securities of an amount close to 780 billion euros have been channelled.

The performance of the share prices in Europe and in Spain in 2018 also affected IPOs and financing obtained through capital increases. In 2018, there were a total of 141 transactions for obtaining financing and stock market launches (with and without a public offering), slightly more than those recorded in 2017, but for understandably lower amounts. Only some capital increases linked to merger processes and the admission of REITs maintained a significant level in terms of cash volume.

Financing and investment flows channelled through the Spanish Stock Exchange in 2018 reached 15.224 billion euros. In spite of being lower than the previous two spectacular years, it still allows the Spanish market to hold a prominent global position for this segment. In 2018, it was positioned 11th out of around 80 stock exchanges considered by the World Federation of Exchanges (WFE) with comparable data as at the close of October.

In the case of capital increases, there were a total of 9,990 for the year, representing a third of those for 2017. In respect of IPOs and after a magnificent previous year, in 2018 the volume of stock market launches in Europe fell by 53% up to the third quarter year-on-year. This quarter recorded the lowest IPO volumes of recent years with a large number of planned transactions being cancelled due to the uncertainty of the stock markets. The Spanish market has not been immune to this trend and even though 31 new companies were admitted to trading up until the beginning of December, a high number, the majority have done so through listing, with no prior IPO (this figure includes one hedge fund and 5 SICAVs admitted to segments of the MAB). The inclusion of companies from the real estate sector still continue to be of particular note, both due to the incorporation of a company of significant size such as Metrovacesa, which in February issued shares for the amount of 646 million euros, as well as the elevated admission rate of REITs (20 new companies) to the specific segment for them of the MAB. The outlook for the coming years indicates that the admission of REITs will continue due to the attractiveness of this figure in channelling institutional investment into the real estate sector. In addition to Metrovacesa, the main market has seen the admission to trading of the Australian company Berkeley Energía, as well as Arima SOCIMI, Amrest Holding and Solarpack.

Capital investment: MAB

Although there has been a growing trend towards a greater diversification of business financing in Spain, particularly in the case of the large listed companies, smaller sized companies still continue to have difficulties. With the aim of improving this situation, the MAB is continuing its mission to become the preferred choice for small- and medium-sized growth companies seeking to obtain financing through capital investment within the securities market ecosystem, informing shareholders and being present in national and international jurisdictions, with a reduced cost adapted to the requirements of each type and size of company. 

Three companies were included in the REIT segment in 2018: Robot, Tier1 Technology and Alquiber. The 41 companies listed in the market carried out 11 capital increase operations for a total of 115 million euros, 3 million more than the previous year.

The REIT segment was the most active of the MAB in 2018, with a total of 20 admissions to trading, bringing the total to 64 companies. These companies have executed 15 operations, more than double that for 2017, raising a total of 379 million euros, up 71% year-on-year.

Corporate operations: M&A and Takeovers

As a reflection of the significant role that the Stock Exchange plays in the market for the control of companies when facilitating corporate operations, the mergers and acquisitions activity was of particular note during the year. Of the mergers that took place, those in the financial sector were of particular significance: Banco Santander and Banco Popular being the most significant, Liberbank and Banco de Castilla-La Mancha, Bankia and Banco Mare Nostrum.

Also in 2018, seven takeover bids were recorded involving the following companies. Axiare, Abertis, Saeta Yield, Hispania, NH Hoteles, Funespaña and Europac; all with positive results. The amount of these bids totalled 20.425 billion euros. Of this amount, 14 billion euros correspond to a single bid, that for Abertis. There has been a significant foreign involvement in these investment operations (five of the bidding entities are foreign), not to mention that four of the objectives of the takeover bids are REITs, a reflection of the intense corporate activity in the Spanish real estate sector.

Listed fixed-income: financing and investment

The Spanish fixed-income markets have adapted their operations to the new European regulation MiFID II, with its more rigorous market and transparency rules, similar to those in effect for the equities markets. In 2018, the Spanish markets and platforms added both new formats, such as the option to trade according to the indication of interest for illiquid instruments, as well as increased the number of issues available for trading. Through the optimisation of the admission to trading processes of the different types of fixed-income issues and the fee structure, the foundations are in place to maintain the strong increase in the number of Spanish companies that raise funds through the issue of fixed-income securities, which according to the Banco de España reached 67 in 2017.

Volatility came back in force to the returns and prices of government and private bonds. Turning to the international government debt markets, a large gap was maintained between the North American and European 10Y rates, with the North American bond remaining at over 3% for the best part of the year until the correction in December, whereas the German bond generally remained at below 0.5%, with the fall in returns accelerating in December. Other bonds markets in the Eurozone were dominated by the tension over the Italian bonds the risk premium of which, compared to the reference 10Y German bonds, exceeded 3 percentage points (300 basis points). With regard to the 10Y Spanish bonds, the risk premium compared to the German reference closed the year at 118 basis points (1.2%), slightly higher than at the beginning of the year.

Trading in Government debt on the Spanish regulated market is carried out using the SEND trading platform. At the close of 2017 the outstanding balance of Spanish regional debt was admitted to the SEND electronic trading platform and at the close of the third quarter of 2018 the listing and subsequent inclusion in the market's electronic platform of all the government debt issues for Germany, France, The Netherlands, Belgium, Italy, Austria, Portugal and Ireland and the European Stability Mechanism (ESM) was completed. After these admissions, the outstanding volume of Spanish and European government debt available for trading on the market's electronic trading platform exceeded 6.2 trillion and subsequently, debt trades have experienced a strong boost to reach 99.284 billion euros for the year. In respect of Government Debt traded through SENAF, the market makers' multilateral platform for government debt reached a volume of 101.088 billion euros: Overall, trading in government debt on the two electronic platforms grew 45% compared to the previous year.

Corporate debt also experienced a year unlike the previous. Even though interest rates continue to remain at an all-time low, they rebounded sufficiently to cause investor losses: the BBB rated European fixed-income generated losses of around 4%.

In aggregate terms, and in line with the international trends, both the main Spanish companies and banks reduced their issues. The majority of these had covered their financing needs in the previous financial year to take advantage the low costs at that time, subsequently their needs for this period decreased. In addition, the market conditions became tougher in 2018 with higher returns being demanded by the market. The balance of outstanding issues on the AIAF Fixed-Income Market fell 9.1% overall, down to 448.487 billion euros at the year-end.

Listed fixed-income: MARF

Although the financing conditions of smaller businesses continued to be favourable in 2018, these companies are still heavily reliant on banking credit, which increases their vulnerability during periods of credit restrictions. Among all the solutions promoted to foster diversification in financing, the Alternative Fixed Income Market (MARF) occupied a prominent position. Designed as a Multilateral Trading Facility in 2013 in order to efficiently incorporate the issues of companies of differing sizes, many of which having no presence in the capital markets, since its start-up to 2018 no fewer than 57 companies used it for financing purposes. 

During the whole of 2018, 35 companies used the MARF to cover their financing needs, either through the registration of promissory note programmes or the launch of bond issues. The total volume of issues admitted to trading on the market totalled 6.357 billion euros, a 60.1% increase on 2017.

The outstanding balance at the close of 2018 was 3.320 billion euros, a growth of 46.9% compared to the previous year. It is distributed as follows: 1.571 billion euros in promissory notes and 1.749 billion euros in bonds issues.

Derivatives: futures and options

The reference market for index- and share- based options and futures, the MEFF, commenced the 2018 financial year under the MiFID II regulations, which for the first time included derivative products in the scope of application of the legislation and its implementing European and domestic regulations. In spite of having maintained a very low level of volatility in relation to historical standards and the lack of attractiveness of some of the main Spanish underlyings traded for investors, especially the banking segment, trading activity remained at a similar level to the previous year with a slight drop of 2.4% to 43.5 million trades in futures and options in underlyings related to equity, indices and shares. Trading in the Spanish market's emblematic product, IBEX 35 futures contracts, increased 1.2% compared to the previous year and the younger products traded on the market, related to hedge dividends, grew 63% year-on-year in the case of the IBEX 35® Impacto Dividendo futures, whereas share dividend futures grew 36% year-on-year.

As of 2018, the Spanish market has an index known as the VIBEX, which monitors the volatility of the stock exchange on a daily basis using the most liquid options of the IBEX traded on the MEFF. According to the VIBEX, the average daily implied volatility was 15%, representing a fall of 0.3 points compared to the previous year and 8.5 points less than in 2016. In addition to the VIBEX in 2018, the Spanish Stock Exchange also had daily access to other new indices closely related to the MEFF options and futures market, which have become part of the extensive IBEX family: the IBEX 35 SKEW volatility trend and the strategic indices with IBEX 35 options.

Based on the guidelines developed by the G20 to prevent the effects of a new financial crisis, the aim is to channel the trading, clearing and settlement of derivative products towards organised markets and central counterparties (CCPs) while at the same time implementing the use of trade registers, known as Trade Repositories, to monitor the volumes of OTC derivatives that are difficult to standardise. Since the entry into force in 2013 of significant rules in this reform process, this is driving an important transfer of OTC trades towards organised markets and central counterparty clearing houses. Furthermore, both the Basel Committee and the IOSCO (an association formed by the regulatory bodies from around the world) have insisted that in the case of OTC derivatives that cannot be settled through CCPs, then the deposit and use of collateral and margins should be generalised.

Central Counterparty: gas and energy derivatives, government debt repos and SWAPS

In May 2018, a service for the natural gas contracts started within the Energy Segment of the central counterparty clearing house operated by BME Clearing. Since then and up until the year-end, 23 settlement participant joined, with a registered volume at the close of 2018 of 1.43 TWh and an open position in contracts of 1.1 TWh. The trades in this product exceeded the initial expectations.

In addition to gas, the electricity derivatives continued to attract the interest in entities active in the sector such as market participants: from 146 entities at the end of 2017 to 158 settlement participant at the close 2018. The volume registered in electricity derivatives in 2018 totalled 12.4 TWh, with an open position that reached a volume of 5.5 TWh at the end of 2018, in line with the volume of the previous year.

In respect of bilateral trades in government debt with a buy-in agreement (REPOS), in 2018, the total volume registered reached 155.637 billion euros, through an average of 179 monthly trades. The financed open position, was 8.243 billion euros at the close of October 2018, with an average financed term of 26 days.

The central counterparty clearing house also provides the service for SWAPS, bilaterally traded interest rate derivatives. It commenced its activities in 2016 and in 2018 registered a total volume of 1.629 billion euros.  The open position reached 463 million euros at the year-end.

Derivatives trade repository: REGIS-TR

With the entry into force four years ago of the obligation to report on derivatives trades in all manner of financial assets to a centralised registry accessible by all the regulators, as provided for in the European Markets Infrastructure Regulation (EMIR), European financial entities have been reporting derivative trades to the European trade repositories (Trade Repository).

REGIS-TR, the registry jointly developed by BME and the German Stock Exchange, is the second largest in Europe with 1,600 open accounts (200 more than the previous year) processing between 10 and 12 million messages a day. The registry registered more than 987 million new trades during the first three quarters of 2018. With regards to its position as repository before the community of supervisors and regulators, REGIS-TR offers information to 38 European regulators through it regulators portal and TRACE, the common information portal of the European Securities and Markets Authority (ESMA), processing more than 250 million messages a day for the regulators. Also over the course of the year, REGIS-TR has positioned and consolidated itself as a foreign repository for the regulatory reporting services it offers under the Swiss FinfraG regulations, the EMIR equivalent in the alpine country.

MiFID II and its incorporation into Spanish legislation

In 2018 the effects of the almost full application and transposition into Spanish Law of the Markets in Financial Instruments Directive (MiFID II), the MIFIR regulation and the many other additional technical rules began to be noticed. The aim is to further the financial integration of the countries of the European Union, correct the operational and transparency defects made evident by the painful global financial crisis, improve the competitive standards and transparency in the functioning of the markets and to provide greater protection to investors.

Its implementation has highlighted that adjustments are still necessary to prevent or minimise the collateral effects that may seriously harm the main functions of the markets, such as, inter alia, equal opportunities, the efficient formation of prices and a system for the requesting and dissemination of unbiased information.

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