Kevin Hall
In a year dominated by the on-off merger between London and Frankfurt, and the consequences for a pan-European exchange, the Madrid Bolsa has stealthily moved into a position of some importance.
Europe’s fourth largest market has seen the gains produced in 1999 built upon, despite turbulent trading during the spring, reflected across Europe. At the end of last year capitalisation represented over 80% of Spanish GDP, a figure considerably higher than in France, Germany or Italy, and more in line with Anglo-Saxon figures. The key to the success of the Bolsa has been the high levels of liquidity, which have continued during the first year of the new millennium. These have been supported by a growing economy, which has outperformed the majority of the Euro-zone nations, with many companies using the market for expansion strategies.
Domestic interest in equities has also been matched by greater foreign investment. Sources at the exchange suggest that as much as 50% of the transaction volume is generated by the participation of foreign investors, and that as much as 35% of shares are owned by non-residents. Spain has long been a retirement haven for north Europeans, many of whom are non-resident for tax purposes, and this may go some way to explaining the figures. There has also been significant activity by north American investors. The involvement of larger foreign institutional investors is reflected in the trading and operation figures. While representing 50% of total sum traded, non-residents accounted for only 17% of operations, reflecting the high volume of orders from this investor sector.
This, 10 years after the reform of the rather antiquated Bolsa, confirms that the introduction of a modern trading and settlement system has been a triumph for the management. It has meant that share ownership has grown domestically to a startling 8m, with individuals holding shares either directly or through the rapidly emerging investment funds. These latter, along with pension funds have increased their share of domestic stocks, but perhaps at a lower rate than might have been anticipated. This is explained by their diversification into foreign stocks, leaving individual investors to take up the slack in the domestic market.
Since the privatisation process began in 1992 the public sector’s share of market capitalisation has fallen from 16.64% to a tiny 0.3% by the end of last year. Private investor participation has seen the sum of their direct stakes rise almost eightfold over the past eight years to an estimated E21.8bn. Their activity represented just 8% of the total trading volume of the Bolsa.
Other investors such as collective institutional investors and banks make up a significant part of the trading volume, comparable with more developed markets.
Angélica Rodriguez, director of investment at AB Asesores Morgan Stanley believes that foreign investment in Spain has focused on larger capitalisation stocks, and this would seem to be borne out by the figures. “This investment is concentrated on the index’s four leading stocks by capitalisation, representing over 60% of the total volume traded. In terms of corporate activity Téléfonica, the big banks, Repsol and Endesa appear at the top of the list of operations.” She believes, however, that there is still a part for small to medium companies to play on the market. “Today it is easy to find stocks with high growth potential at ridiculously low prices.”
Can Madrid continue this growth into next year, and what are the consequences for European consolidation? Ignacio Polavieja of Inverbolsa in Madrid believes after a slight setback the Bolsa is back on track. “The beginning of the year saw a fast and dramatic increase in the main index, but after March some of the foreign money left, following crises across other markets and particularly sectors such as TMT. Now, however, we are perhaps looking a little undervalued, and the strength of the dollar has meant money flowing back in.”
Polavieja also points out that Madrid is a relatively inexpensive market to operate on, and this has been a major factor in attracting foreign inflow. Current doubts across all markets may mean less liquidity and a shortage of supply to the year end. Figures from the European Stock Market Federation show that 1999 was a record year for IPOs in Madrid, involving equity valued in excess of E50bn. Indeed, the Bolsa was the European market with the highest number of new domestic companies admitted last year. But Polavieja warns that the supply of paper may be about to dry up. “The current uncertainty has meant that a large number of significant offers have been delayed until 2001.”
The other significant development in Madrid during the last year has been the performance of Latibex, the Latin American stock market in euros. Antonio Zoido, chairman of the Madrid Bolsa, said earlier this year that the internationalisation of capital and the aim of a cross-border market had been behind the development of Latibex. “The aim of the market is to offer European investors the opportunity of trading in the principal Latin American stocks in a single currency, in their own time zone and through an electronic trading and settlement system to which they are already accustomed.”
The introduction of new companies to Latibex during the past six months has meant that some of the largest companies in the region are represented. While this is attractive for investors, so far it has failed to encourage other smaller companies to come aboard. Nonetheless, Latibex accounts for 15% of capitalisation in Latin America, around E85bn. Polavieja says that, despite this, activity is muted at the moment. “Strong companies are backing this project, and although it is not attracting a lot of interest at the moment, it clearly is a project with a future. Quite what that will be in the light of pan-European plans remains to be seen.”
On that front he firmly believes that Madrid is keen to move to a single market. “There have been approaches from Euronext, but everyone is watching the London-Frankfurt situation.” He believes that Madrid could yet turn out to be a key player. “If London can fight off the OM bid, then during the next round of talks they will be looking for support from other markets, and Madrid could be a key player given the growth of the past few years.”