2013 IN REVIEW. Antonio J. Zoido Chairman of BME. #Balancebolsa. Madrid, 17 December 2013

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1 2013 IN REVIEW Antonio J. Zoido Chairman of BME Madrid, 17 December 2013 #Balancebolsa

2 TOP TEN HIGHLIGHTS 1. The IBEX 35 posted an annual return of 15% so far in 2013, its best result of the past four years. Spain s benchmark index is trading at 2-year highs, while the risk premium has fallen substantially since July Non-resident investment in the stock market remains very high, at over 79% of the total. 2. Trading in shares has also improved substantially. Cumulative trading through November topped 643 billion, above the figure for all of Particularly noteworthy is that the number of trades is up 15%, at 44.3 million. 3. Spain s stock market capitalisation stands at 1.05 trillion, 11% higher than at the end of last year. Once again, Santander, Telefónica and BBVA have been the Euro Stoxx 50 s most liquid stocks. 4. The Spanish stock market once again offers the highest dividend yield, of 5% compared to the European average of 3%. Through November, Spanish companies have paid 22.1 billion in dividends to shareholders. 5. Investment flows channelled through the stock exchange in 2013 exceed 31 billion (+27.3%), making it the third largest market in the world by investment flows. 1

3 6. New IPOs, strong interest. Several companies, such as Applus, ONO and Aena, have said they are planning to come to market in Policies that support capital issues by companies and the use of the securities markets and a reduction in debt must be encouraged. 7. Household investment in shares this year amounts to billion. Private investors are investing 7.3% of their savings in equities, their highest exposure in six years. Households directly own more than a quarter of the shares traded on the stock exchange, the highest level in nearly a decade. 8. European markets are facing a broader regulatory framework in the future. The challenge will be to avoid a repeat of the circumstances that triggered the current crisis. We have grouped our central counterparty (CCP) activities together into BME Clearing, while ESMA has authorised REGIS-TR to act as the OTC derivatives trade repository. 9. By setting up MARF, we are taking yet another step in helping companies raise finance in the markets. The first Members and Registered Advisors have been authorised. 10.Helping companies obtain financing has now become one of the main concerns of national and international bodies alike. The development and support of funding arrangements via the securities markets is also an alternative for SMEs, which are key drivers of output and employment. 2

4 Good afternoon and welcome. Thank you all for attending this traditional Christmas lunch here at the Stock Exchange, which gives us the opportunity to share an enjoyable moment and look at what the year has brought to the markets. I am happy to say that this year s review is the most satisfactory with regard to trading, since the crisis began. The figures speak for themselves. Spain s stock market is up 15%, leaving it on track to end the year among Europe s best performers. Meanwhile, the risk premium, which punished Spanish companies so severely, has eased back to its two-year low. Spain is no longer the riskiest country and the international pressure that sent the Spanish stock market and the share prices of many Spanish companies tumbling has apparently subsided. Foreign investors are again looking at and investing in our market, and in a big way. Foreign direct investment has doubled and is currently at its highest since the crisis began. While news is good as 2013 draws to an end, there have certainly been some struggles this year. The situation in the first half of 2013 was tense. There was even a possibility that the Spanish economy would need to be bailed out. Lacklustre economic data, rampant unemployment and excessive debt eroded the markets confidence in Spain. In the second half, however, Spanish, as well as European economic indicators turned less negative and the situation began reversing. Government reforms and international agreements have helped keep the situation from weakening further. However, little has been done to address the main problems. 3

5 Spain s debt remains high and there is still little activity on the credit market. Companies need to tap capital markets for finance and authorities need to encourage this. To continue making inroads and help steer the economy towards recovery, work must continue on building a new model, one with a different structure to the current one, with less leverage and easier access to funding through various channels. Markets play a crucial role in this process and can provide the response to today s needs. I have harped on this theme throughout the crisis. For the past few years, as we take stock at the year-end, we see how activity in regulated markets has proven to be efficient, transparent and secure, even when the economy is struggling. Globally, awareness has increased regarding the hurdles companies must overcome to raise finance. This is their greatest worry at present. That much is clear. Unless SMEs, small- and medium-sized enterprises, stage a comeback, there won t be any economic recovery in Spain. THE SPANISH STOCK MARKET S BEST YEAR SINCE 2009 Spain has gone from being a risky country to a preferred investment destination. A host of upbeat reports have come out in the past few months, supported largely by the improvement in economic indicators and the appeal of listed companies, which after a lengthy slide left them trading at historically low prices. Momentum has been especially strong in the latter part of this year. The IBEX 35 is up 15% in 2013 and 55% in the past 18 months. This is its best performance since

6 Record year for medium and small caps On the whole, 2013 will go down as a good year for Spanish listed companies. But it has been exceptionally good for medium and small cap stocks. The IBEX MEDIUM CAP and IBEX SMALL CAP indices have both racked up gains of over 40%. More and higher quality trading The share price rally has been accompanied by higher trading volumes. Trading through November topped 643 billion, 0.24% above the total for Noteworthy is the 15% increase in the number of trades carried out in the period, to 44.3 million. October set a new monthly record, with 6.4 million trades. This year marks the 25 th anniversary of the Spanish Securities Market Act. In this time, both trading volume and the number of trades carried out on the stock market have increased by 50-fold. Increased liquidity, lower costs The boost to trading in shares of Spanish companies, which has been of high quality, has a direct, positive impact for investors. The valuation range has narrowed considerably, resulting in cost savings. This is because liquidity has increased as the economy has stabilised. What s more, this progress has been made amid less stock market volatility. Fluctuations this year have been in line with their long-run average and are at their lowest since

7 Mixed performances in other trading areas Activity in the exchange-traded funds (EFT) segment has also been strong this year. More than 3.8 billion were traded in the first 11 months of the year, up 52% from the same period in Also noteworthy is the increase in assets under management in the main ETFs indexed to the IBEX 35. Turning to the Derivatives market, although the volume of contracts traded has fallen 20% from last year, to 48 million, volumes in certain products have increased. In IBEX 35 Futures and Options, for instance, volumes are up by 14% and 26%, respectively. Trading in the Corporate Debt market through November totalled 1.16 trillion, 50% less than a year earlier. Trading of public debt in SENAF, BME s wholesale electronic trading platform, was up 50% year-on-year at the end of November. The inclusion of Public Debt in the SEND Fixed-Income platform for retail investors has caused trading on this platform to more than double (133%). Settlement and Registration in 2013 Equity settlements by Iberclear rose 5.2% year-on-year through November, to a daily average of 2.96 billion from 2.81 billion in the same period last year. Balances registered by the AIAF Fixed Income market through November dropped by 15.7% year-over-year in listed Fixed-Income securities, but were up by 13.3% in the Public Debt market. In Equities, the balance was 30.7% higher than in December

8 Market cap reaches 1 trillion Higher market liquidity has driven up the valuations of listed companies and market cap to over 1 trillion. Spanish stocks among the most liquid in Europe The quality of trading in Spanish securities is gaining wider recognition internationally. Santander, Telefónica and BBVA have been the most liquid stocks on the Euro Stoxx 50 in 2013, while Inditex, Iberdrola and Repsol are also among the best. Shareholder remuneration steady despite the crisis Shareholder remuneration remains a priority for Spanish companies. Dividends in Spain increased by ten fold from 1990 to 2012 and by 15% during the crisis years from 2007 to Through November 2013, Spanish companies have paid shareholders a total of 22.1 billion, 11% less than in Some companies have put dividend payments on hold in order to preserve capital, pay down debt and strengthen their balance sheets. The highest dividend yield in the world The appeal of the Spanish stock market remains intact, offering investors a dividend yield of 5%, the highest among the world s main markets. Some IBEX 35 companies are offering dividend yields of 6% or higher, compared to the European average of 3%. MAB stocks post the highest gains this year There have been fewer new admissions to trading on the MAB in 2013 than in years past. In fact, Ebioss Energy has been the only addition this year. 7

9 This market, which has provided Spanish SMEs with an appropriate and efficient, alternative source of raising finance, needs fiscal support to finally take off. Carbures and Gowex, two constituents of this market, were winners in the first edition of the European Small and Mid-Cap Awards, sponsored by the European Commission to achieve recognition in Europe and provide international visibility to European SMEs. Since MAB was created, the companies listed on this market have raised more than 218 million of funds. Launch of the new REITs segment A new segment for SOCIMIs (REITs) was opened on the MAB in 2013, with two SOCIMIs now listed. As you know, SOCIMIs are Spain s version of real estate investment trusts (REITs). MARF created to provide a new source of funding Since October, companies now have additional support through the Alternative Fixed Income Market (MARF for its initials in Spanish). MARF is a multilateral trading facility for Fixed Income targeting institutional investors. It provides a complementary and alternative financing channel for Spanish companies that is more accessible and affordable, and that also affords them an opportunity to bolster their reputation, visibility and accessibility to investors. World s third largest market by investment flows The crisis has shown that at the worst moments the existing financing scheme has hampered economic growth. Because of the system s severe impact on the economy and society, a major change was needed, and a more balanced structure. 8

10 Spanish companies can leverage the increasing funding opportunities available in the markets. To illustrate its efficiency, in the past five years the Spanish stock exchange has channelled 132 billion of capital to listed companies. This year, flows channelled through the Spanish stock exchange to November amount to 31 billion, up 27.3% from This ranks third in the world and shows how the market is successfully fulfilling its important role as a source of finance for companies. New IPOs, strong interest The primary market is waking up from its lethargy, with several Spanish companies, such as ONO, Applus or AENA, expressing their desire to leverage the improvement in markets and begin plans to come to market in Household investment in stocks at 6-year highs Spain s stock market is again one of the preferred markets for international investors. This has become particularly evident in the second half of Foreign investment in the market represents almost 80%. This compares to 63.9% at the end of November 2012, showing the significant change in perception regarding Spanish companies. Confidence in the Spanish market has not only been shored up among large investors. Households have raised their position in the stock market considerably. According to the latest data from the Banco de España, Spanish households held billion worth of shares at the end of the first half this year, 23% more than the year earlier. Private investors are investing 7.3% of their savings in Equities, their highest exposure in six years, since the crisis began. 9

11 More than a quarter of all shares in the market are held by Spanish households, 10 points above the European average and the highest level in nearly a decade. READY FOR THE NEW REGULATORY FRAMEWORK Markets will be facing a broader regulatory framework starting next year. September marked the fifth anniversary of the Lehman Brothers collapse, an event that shook up the financial world and caused the then-months-old crisis to reach unthinkable levels. The OTC derivatives market became the centre of the financial crisis and one of the main targets of the reforms to regulations and financial oversight spearheaded by the G20. BME Clearing to encompass CCP activities The Spanish market is working hard to respond, quickly and efficiently, to the new regulatory requirements. Trade and clearing activities, previously carried out by MEFF, have been effectively separated. MEFF is now the new governing company for the derivatives market (Sociedad Rectora del Mercado de Productos Derivados), with BME Clearing acting as the central counterparty (CCP). The objective is to foster transparency and reduce risks in derivatives trading. BME Clearing handles the transactions that take place in the three activity segments operated by BME that are CCP cleared: Financial Derivatives, Public Debt Repos and Electricity Derivatives. In the future, it will also encompass the clearing of the cash market (Equities and Fixed Income), currently being set up within the framework of the reform to Clearing and Settlement in Spain. REGIS-TR authorised by the European supervisory authority, ESMA Last month, REGIS-TR, the repository for European OTC derivates trades operated by Iberclear and Clearstream, was authorised by the European 10

12 supervisory authority, ESMA, to begin its operations. This marks a major milestone for the company, helping our clients meet their reporting obligations in Europe through a user-friendly and efficient service. EU warning about FTT risks Markets are becoming more efficient thanks to the reforms to regulations and market supervision in Europe. However, certain actions could, if carried out, cause a delay or pose an obstacle to the planned improvements. The debate over the convenience of applying a financial transaction tax (FTT) has continued this year and criticism has been virtually unanimous. Countries already applying the FTT (e.g. France and Italy) have seen increasing opposition. Even the legal service of the European Union has warned that establishment of this type of tax would be in violation of the EU Treaty. Tax on market operations would distort activity and lead to higher costs of capital at a time when companies are searching for alternative channels to survive and expand. THE NEXT CHALLENGES On the whole, 2013 has been a positive year for the stock market and steadier one for the Spanish economy. The year began with pressure from the threat of a potential bailout for Spain and ended with the Spanish economy on the verge of recovery. Technically, Spain is no longer in recession. Exports and tourism are at record highs, investment in the country has risen, corporate earnings are improving and non-residents are investing heavily in Spanish stocks and bonds. 11

13 The ECB has cut interest rates to an all-time low of 0.25% and the President does not rule out adopting other extraordinary measures, a clear sign of the problems plaguing Europe s economy and financial system. Prospects for Spain remain subdued, as, regrettably, there are still myriad problems lingering from the crisis. Regulators and supervisors still focused on price formation and trading venues Technology has helped drive the spectacular growth of securities markets in recent years, with regulations and supervision focusing heavily on the trading systems that provide the basic function of price discovery. Financing to become the focal point in coming years I doubt it will be long before another key role of markets, the provision of funding for companies, joins technology and the social communication approaches brought about by this technology to drive major changes in our financial systems. In a nutshell, the crisis has led to the conviction that the excessive degree of leveraging must come down, that more capital is required and that, in short, balance sheets in general need to become more balanced. Accordingly, the banking system, in a variety of ways, must offer access to other financing schemes. When the opportunity to fill this void in financing comes into play with the general technological and cultural elements, this will provide considerable momentum to the trend towards a change in model. This change is not only possible in banking, as many predict. In my personal opinion, the change in model will come about quickly in securities markets as well. The creation of the MAB or the MARF, or similar alternative instruments in other countries, is a clear indication of the emergence of new mechanisms, 12

14 new ways of financing that must be addressed. While these may appear to be tenuous, and not very broad or intense phenomena, I still believe they point to a momentous change. These alternative instruments, as well as their counterparts, relate to and arise from what I would call a classical order, on traditional foundations if you will. The next step could be something very different. Change in financing, technology and communication will lead to mechanisms in which capital plays a greater role and debt a less prominent role The rupture of the excessive weight of bank debt, available technology and the existing culture of communication should give rise to new substitute mechanisms, in which capital plays a greater role and debt a less prominent role, and the use of other assets that can support the various balance sheet line items. At the time, the precedent of the US showed the negative effects of market fragmentation through the MiFID directive. One can say that subprime mortgages triggered the crisis, which lit the fuse of underlying imbalances elsewhere in the world. Now, once again, precisely in the highly fragmented US markets with 391 trading venues, we must see what is beginning to unfold regarding the creativity of new financing mechanisms. And as part of what is to come, the securities markets should play a role, given their independent position and strong credibility (underscored throughout the crisis). I suspect that this role, geared toward financing for companies, will no longer respond to a classical order in respect of how it addresses this or of the assets involved, like that of our latest projects, as mentioned above. 13

15 The roles of the various actors in the financial industry may begin to shift and become indistinguishable. And regulators and supervisors will surely have an arduous task delimiting the scope of action and enabling tightly regulated and supervised areas to be compatible with others that appear and grow in practically virtual areas. As markets, we have the chance to reinforce our financing role for the good of everyone. However, many things will be new, and not particularly easy. Thank you very much for your attention. Happy holidays and a Happy New Year for you and your families. 14