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Economic and stock market environment

In 2015, the stock market of the BVL experienced a severe drop in price terms.

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Stock market environment

In 2015, the stock market of the BVL experienced a severe drop in price terms, the largest after the collapse of the global financial crisis in 2008. In terms of trading, the figures show clearly the fall in demand of shares during this period: the amount traded in 2015 was the lowest in the last eleven years, while the number of operations performed was the lowest since 2002.

Stock markets in the world were affected by different events and circumstances throughout the year, among which the following are highlighted: the slowdown in China, considered the world's largest economy; the fall in prices of raw materials (especially oil); expectations for the decision of the Federal Reserve to enforce raising its benchmark rate; the appreciation of the US dollar; the plight of Greece -which continued to disrupt the stability of the euro zone; and in the particular case of the BVL and MILA, the possible reclassification downwards of our market.

In the first quarter, the Lima stock market experienced a significant drop (about 10%), showing a differentiated behavior regarding the main markets in the world, which showed positive variations, especially in Europe (driven by an expansionary monetary policy). While precious metals had a high volatility in the first three months, in March returned to the prices of the beginning of this year, while copper, lead and zinc recorded negative variations (between -3% and -5%).

In April, some weak data from the US economy strengthened the position of a delay in the rise in rates from the Fed, which generated a buying wave towards the equity markets and an improvement in prices of commodities. Also the local market was favored by bargain hunting, as well as some government measures implemented in order to encourage investment and consumption.

However, the downtrend returned in May, promoted by new data from the US economy and statements from the Federal Reserve that rekindled expectations of an imminent rate increase from the Fed, which led to the strengthening of the dollar to the detriment of prices of raw materials and -thus-for shares related to their activities.

In late June, the context changed because Greece and its creditors failed to reach an agreement to prevent the country ceases payments on its debt. The situation was further complicated because the Greek government -by not accepting the conditions imposed by the ECB and the IMF- had to impose capital controls by arranging the closure of banks and financial institutions for several days.

This situation lasted until mid-July, when both sides reached to an agreement after intense negotiations. However, the major probability for Fed to raise rates as well as the preliminary data from China's manufacturing industry- which showed more signs of a slowdown in its economy-contributed to restore the decline.

On the other hand, after starring in an exceptional rally throughout 2014 and in the first part of 2015, the China stock market had its first severe correction in July, sparking panic among retail investors (85% market share), forcing the Beijing authorities to take a number of urgent measures, such as providing liquidity to increase demand, ask companies to acquire their own shares and investigate short selling classified as malicious action.

This critical situation was partially overcome by a slight recovery, but the surprise decision by China's central bank to devalue the Yuan for the first time in 20 years impacted negatively on all markets and industrial metals (second week of August). It should be noted that from following these measures, the price of oil (Texas WTI variety) crossed the barrier below US $ 40 / barrel.

Additionally, in particular, the BVL was shaken by the announcement of the index provider Morgan Stanley Capital International (MSCI), based on the completion of a consultation to assess the downward reclassification to the Peruvian Stock market, to rate it as "frontier market "(currently it is considered as "emerging market"). Following this announcement, August became the month of greatest loss, registering a fall of indexes between 12% and 15%.

In October, doubts reappeared on whether the Fed would raise its rates soon, which led to a weakening of the dollar and a partial resurgence of commodities. To this, the MSCI decision to keep the BVL in the category of emerging market (until mid-2016, when a new query will be made) was added, which resulted in a moderate rise in stock prices.

However, in November and December, the market indicators showed negative variations, when considering imminent the decision of the Federal Reserve

to raise its rates, which effectively occurred on December 16th when the Fed officially announced the change: after nearly a decade the first rise in benchmark rates was made, marking an end to the US crisis of 2008.

In this context, in Wall Street the Standard & Poor's 500 indexes and the Dow Jones Industrial Average ended the year with variations of -1.75% and -1.66%, while the Nasdaq Composite increased 5.73%. In Europe, results were different: the Frankfurt and Paris indexes increased about 9%, while those in London and Madrid decreased 5% and 7% respectively. In Asia, the Tokyo and Shanghai stock markets increased 9%; while Hong Kong closed recording a decrease of 7%.

Locally, the indexes of the BVL closed 2015 experiencing setbacks for the third consecutive year: S & P BVL Peru Select decreased 27.3%, while S & P BVL Peru General, S & P BVL IBGC and S & P BVL Lima 25 decreased in greater proportion: -33.4%, -33.5% and -36.3%, respectively. When translating these variations in dollars, losses are quantified between -36% and -44%.

The sector index with further deterioration was the industrial sector which decreased 41.1% (driven by the sharp decline that had the actions related to the construction industry), followed by financial industry (-26.9%) and consumer goods sector (-16.9%). As expected, the service sector was the one with lower losses (-14.7%), being composed of defensive shares (such as Edegel, Edelnor, Enersur and Luz del Sur). The Juniors subsector which showed a decrease of 62.8% deserves to be mentioned.

According to the above, in 2015 the BVL numbers clearly showed the growing risk aversion that prevailed in the market, especially in the stock market. The total annual amount negotiated was 3,516 million dollars (-39%), and the daily average 14.18 million dollars, almost a third less than the average of 2014 (22.97 million dollars). The most significant reductions occurred in the cash equity mechanism (-50.6%) and reports (-35.2%). For fixed income, the negotiated amount reached 1,023 million dollars, showing only a slight reduction compared to that obtained in 2014 (-2.64%), however this category increased its share in the total amount traded from 18.64 % (in 2014) to 29.11% of the total traded.

The decreasing trend of the liquidity of our market in 2015 is showed most clearly in the statistics of a number of transactions: the monthly average in the fourth quarter (5,442 transactions) was almost half the monthly average achieved in the first quarter (10,369 transactions). In total, 94,755 transactions were recorded, this is, 41% less than the previous year.

Another market variable that was affected by the scenario described was the Market Capitalization, which was 90,657 million dollars (25% less than 2014). It should be noted that historically the market valuation just reached the barrier of 100,000 million dollars in 2009, having reached levels above 160,000 million dollars in December 2010.

Regarding the number of issuers with securities listed in the BVL, at the end of 2015 that number was 276, remaining without much variation in the previous year (275). However, the entry of 14 new issuers should be noted, including Banco Agropecuario – Agrobanco, Cosapi S.A., Administradora Jockey Plaza Shopping Center S.A., United Cacao Limited, Crecer Seguros S.A. Cía. de Seguros, Termochilca S.A., Tekton Corp. S.A.C. and Electrovía S.A.C., these last two with fixed income securities listed in the Alternative Investment Market - MAV. In this way MAV continues its consolidation with securities of seven (07) companies registered in market.

Also during the past year a total of eighty-seven (87) new securities were registered ​​for trading on stock exchange sessions: 11 shares and 76 debt instruments. In the case of the latter, 61 issuances were from private companies and 15 issuances from government bonds and bills. In this way, 2015 ended with a total of 301 registered and valid issuances, distributed in 263 bond issuances and 38 short-term instruments issuances.

Issuances of fixed income securities reached the amount of 1,395 million dollars, an amount obtained through the placement of 75 debt instruments - among bonds and short-term instruments-, corresponding to loans made by 37 companies. This sum was more than 19.50% of the amount recorded in 2014 (1,167.5 million dollars), highlighting issuances in domestic currency, which represented 75% of the loans made.

Per type of instrument, placements made with corporate bonds (68% of total placed) predominated, followed by asset-backed securities (12%) and negotiable deposit certificates (10%). Among the major placements performed are the corporate bonds issued by Yura S.A. (502 million soles), Alicorp SAA (500 million soles) and Gloria SAA (443 million soles).

As regard of investment funds during 2015 the number of funds with registered participation shares remained at 9, while secondary trading of such shares experienced an increase of 27.40% -versus the result obtained in 2014-, obtaining an amount of 16.96 million dollars. This sum was achieved

through 233 transactions with participation shares of Coril investment funds Short and Medium Term Instruments 1, 2 and 4 and Coril Financial Instruments 5 and 7 (administered by Grupo Coril Sociedad Administradora de Fondos S.A).

In the second half of the year as part of the efforts being made to develop a deeper market and greater investment options, the BVL prepared a list of different securities ​​in the context of recent regulatory changes that allow Stockbroker companies and BVL itself register automatically Foreign Securities - including ETFs- in the Stock Market Public Registry of and the Stock Market Registry.

Thus, on July, August and December 2015, the BVL registered under this automatic listing mechanism a total of 52 new securities: 28 ETFs and 24 foreign shares. The securities ​​listed include ETF's from the US market index (S & P 500, Russell 2000, Nasdaq 100, Dow Jones Industrial) and European and Asian markets (Euro Stoxx 50, MSCI Germany, MSCI All Asia ex Japan, MSCI Japan); and currency and metals, among others. Also, the shares of companies from various sectors such as Apple Inc., Bank of America Corp. Facebook Inc, Nike Inc., Pfizer Inc. were registered, so that at the end of 2015 a total of 32 ETFs and 47 foreign shares were registered for trading in the Stock Exchange Sessions.

Economic environment

As for the evolution of the global economy, most analysts agree to say that during 2015 its performance was weak - some describe it as disappointing-, because many countries continued to suffer from high unemployment and high debt levels. While earlier this year the main multilateral agencies estimated that growth in the world economy would exceed 3.5%, the most recent projections indicate that such growth was around 3.0%, as a result from the combination of different factors.

A key element was the slowdown in the Chinese economy, which in 2015 reached an expansion of 6.9% (vs. 8.6% - average rate - of the previous five years). This setback decreased the demand for metals, oil and food, affecting their prices and reducing their investments abroad.

Another important aspect was the influence that generated the announcement of higher interest rates in the US and the expectation on when it would be implemented.

This added volatility to the markets, increasing aversion to risk, and strengthening the US dollar, which in turn had a negative impact on commodity prices.

This has especially harmed the commodity-exporting countries, including Russia (-3.7%) and Brazil (-3.8%), whose results contrast with the expansions achieved by Asian countries, in addition to the aforementioned expansion of China, highlighting the cases of India (+ 7.3%) and Indonesia (+ 4.8%) and the moderate growth achieved by the economies of the United States (+ 2.4%) and the United Kingdom (+ 2.2%).

In this scenario, it is estimated that Latin American countries as a whole decreased 0.3%, where the development of the Peruvian economy whose production reached a growth of 3.26% is remarkable, becoming the second highest increase in the region.

In this regard it should be noted the upward trend experienced by the GDP throughout the year, registering the first quarter a rate of 0.6%, then increasing and closing the fourth quarter with a 1.9% growth. From the perspective of aggregated demand, increased spending on private consumption (+ 3.4%) and government spending (+5.8) were important, while gross fixed investment decreased 6.6%.

Per activities, the momentum of GDP was sustained by the contribution of mining and hydrocarbons industries- with a 9.27% growth ​​- followed by Other Services (4.37%), Financial and Insurance (9.71%) and Trade (3.88%) that together contributed 2.6 points to the overall figure. The items that showed a deterioration in their transactions were Construction (-5.86%) and Manufacturing (-1.67%).

Inflation this year experienced a significant increase, reaching 4.40% - the highest rate since 2011-, which exceeds the target rate of Banco Central de Reserva (between 1% and 3%) for the second time. Consumer groups that had more impact on this result were Food and Beverages (5.37%), Rental Housing, Fuel and Electricity (7.75%) and Leisure, Fun, Cultural and Education Services (+ 4.3%).

One of the factors that contributed most to this increase in prices of the economy was the depreciation experienced by our currency, an event that was common globally due to the strengthening of the US dollar. Thus, the exchange rate- which ended at 2.98 soles on 2014 - began to increase moderately in the first half (3.16 soles in June),

recording a further increase in the second half of the year, to close at 3.41 soles.

As for monetary policy, Banco Central de Reserva changed the orientation of its instruments according to the situation. In January, to reduce the interest rate by 25 pbs (from 3.50% to 3.25%) was decided in response to the slowing economy and external factors; however this expansive regime changed in the last quarter. In September, the central bank raised the rate to 3.5% in order to moderate an increase in inflation expectations against the rising prices of some food and currency depreciation. Subsequently, in December, the BCR increased the rate to 3.75% due to increased inflation expectations, which were above the target range. 

Temas

Stock market environment

In 2015, the stock market of the BVL experienced a severe drop in price terms, the largest after the collapse of the global financial crisis in 2008. In terms of trading, the figures show clearly the fall in demand of shares during this period: the amount traded in 2015 was the lowest in the last eleven years, while the number of operations performed was the lowest since 2002.

Stock markets in the world were affected by different events and circumstances throughout the year, among which the following are highlighted: the slowdown in China, considered the world's largest economy; the fall in prices of raw materials (especially oil); expectations for the decision of the Federal Reserve to enforce raising its benchmark rate; the appreciation of the US dollar; the plight of Greece -which continued to disrupt the stability of the euro zone; and in the particular case of the BVL and MILA, the possible reclassification downwards of our market.

In the first quarter, the Lima stock market experienced a significant drop (about 10%), showing a differentiated behavior regarding the main markets in the world, which showed positive variations, especially in Europe (driven by an expansionary monetary policy). While precious metals had a high volatility in the first three months, in March returned to the prices of the beginning of this year, while copper, lead and zinc recorded negative variations (between -3% and -5%).

In April, some weak data from the US economy strengthened the position of a delay in the rise in rates from the Fed, which generated a buying wave towards the equity markets and an improvement in prices of commodities. Also the local market was favored by bargain hunting, as well as some government measures implemented in order to encourage investment and consumption.

However, the downtrend returned in May, promoted by new data from the US economy and statements from the Federal Reserve that rekindled expectations of an imminent rate increase from the Fed, which led to the strengthening of the dollar to the detriment of prices of raw materials and -thus-for shares related to their activities.

In late June, the context changed because Greece and its creditors failed to reach an agreement to prevent the country ceases payments on its debt. The situation was further complicated because the Greek government -by not accepting the conditions imposed by the ECB and the IMF- had to impose capital controls by arranging the closure of banks and financial institutions for several days.

This situation lasted until mid-July, when both sides reached to an agreement after intense negotiations. However, the major probability for Fed to raise rates as well as the preliminary data from China's manufacturing industry- which showed more signs of a slowdown in its economy-contributed to restore the decline.

On the other hand, after starring in an exceptional rally throughout 2014 and in the first part of 2015, the China stock market had its first severe correction in July, sparking panic among retail investors (85% market share), forcing the Beijing authorities to take a number of urgent measures, such as providing liquidity to increase demand, ask companies to acquire their own shares and investigate short selling classified as malicious action.

This critical situation was partially overcome by a slight recovery, but the surprise decision by China's central bank to devalue the Yuan for the first time in 20 years impacted negatively on all markets and industrial metals (second week of August). It should be noted that from following these measures, the price of oil (Texas WTI variety) crossed the barrier below US $ 40 / barrel.

Additionally, in particular, the BVL was shaken by the announcement of the index provider Morgan Stanley Capital International (MSCI), based on the completion of a consultation to assess the downward reclassification to the Peruvian Stock market, to rate it as "frontier market "(currently it is considered as "emerging market"). Following this announcement, August became the month of greatest loss, registering a fall of indexes between 12% and 15%.

In October, doubts reappeared on whether the Fed would raise its rates soon, which led to a weakening of the dollar and a partial resurgence of commodities. To this, the MSCI decision to keep the BVL in the category of emerging market (until mid-2016, when a new query will be made) was added, which resulted in a moderate rise in stock prices.

However, in November and December, the market indicators showed negative variations, when considering imminent the decision of the Federal Reserve

to raise its rates, which effectively occurred on December 16th when the Fed officially announced the change: after nearly a decade the first rise in benchmark rates was made, marking an end to the US crisis of 2008.

In this context, in Wall Street the Standard & Poor's 500 indexes and the Dow Jones Industrial Average ended the year with variations of -1.75% and -1.66%, while the Nasdaq Composite increased 5.73%. In Europe, results were different: the Frankfurt and Paris indexes increased about 9%, while those in London and Madrid decreased 5% and 7% respectively. In Asia, the Tokyo and Shanghai stock markets increased 9%; while Hong Kong closed recording a decrease of 7%.

Locally, the indexes of the BVL closed 2015 experiencing setbacks for the third consecutive year: S & P BVL Peru Select decreased 27.3%, while S & P BVL Peru General, S & P BVL IBGC and S & P BVL Lima 25 decreased in greater proportion: -33.4%, -33.5% and -36.3%, respectively. When translating these variations in dollars, losses are quantified between -36% and -44%.

The sector index with further deterioration was the industrial sector which decreased 41.1% (driven by the sharp decline that had the actions related to the construction industry), followed by financial industry (-26.9%) and consumer goods sector (-16.9%). As expected, the service sector was the one with lower losses (-14.7%), being composed of defensive shares (such as Edegel, Edelnor, Enersur and Luz del Sur). The Juniors subsector which showed a decrease of 62.8% deserves to be mentioned.

According to the above, in 2015 the BVL numbers clearly showed the growing risk aversion that prevailed in the market, especially in the stock market. The total annual amount negotiated was 3,516 million dollars (-39%), and the daily average 14.18 million dollars, almost a third less than the average of 2014 (22.97 million dollars). The most significant reductions occurred in the cash equity mechanism (-50.6%) and reports (-35.2%). For fixed income, the negotiated amount reached 1,023 million dollars, showing only a slight reduction compared to that obtained in 2014 (-2.64%), however this category increased its share in the total amount traded from 18.64 % (in 2014) to 29.11% of the total traded.

The decreasing trend of the liquidity of our market in 2015 is showed most clearly in the statistics of a number of transactions: the monthly average in the fourth quarter (5,442 transactions) was almost half the monthly average achieved in the first quarter (10,369 transactions). In total, 94,755 transactions were recorded, this is, 41% less than the previous year.

Another market variable that was affected by the scenario described was the Market Capitalization, which was 90,657 million dollars (25% less than 2014). It should be noted that historically the market valuation just reached the barrier of 100,000 million dollars in 2009, having reached levels above 160,000 million dollars in December 2010.

Regarding the number of issuers with securities listed in the BVL, at the end of 2015 that number was 276, remaining without much variation in the previous year (275). However, the entry of 14 new issuers should be noted, including Banco Agropecuario – Agrobanco, Cosapi S.A., Administradora Jockey Plaza Shopping Center S.A., United Cacao Limited, Crecer Seguros S.A. Cía. de Seguros, Termochilca S.A., Tekton Corp. S.A.C. and Electrovía S.A.C., these last two with fixed income securities listed in the Alternative Investment Market - MAV. In this way MAV continues its consolidation with securities of seven (07) companies registered in market.

Also during the past year a total of eighty-seven (87) new securities were registered ​​for trading on stock exchange sessions: 11 shares and 76 debt instruments. In the case of the latter, 61 issuances were from private companies and 15 issuances from government bonds and bills. In this way, 2015 ended with a total of 301 registered and valid issuances, distributed in 263 bond issuances and 38 short-term instruments issuances.

Issuances of fixed income securities reached the amount of 1,395 million dollars, an amount obtained through the placement of 75 debt instruments - among bonds and short-term instruments-, corresponding to loans made by 37 companies. This sum was more than 19.50% of the amount recorded in 2014 (1,167.5 million dollars), highlighting issuances in domestic currency, which represented 75% of the loans made.

Per type of instrument, placements made with corporate bonds (68% of total placed) predominated, followed by asset-backed securities (12%) and negotiable deposit certificates (10%). Among the major placements performed are the corporate bonds issued by Yura S.A. (502 million soles), Alicorp SAA (500 million soles) and Gloria SAA (443 million soles).

As regard of investment funds during 2015 the number of funds with registered participation shares remained at 9, while secondary trading of such shares experienced an increase of 27.40% -versus the result obtained in 2014-, obtaining an amount of 16.96 million dollars. This sum was achieved

through 233 transactions with participation shares of Coril investment funds Short and Medium Term Instruments 1, 2 and 4 and Coril Financial Instruments 5 and 7 (administered by Grupo Coril Sociedad Administradora de Fondos S.A).

In the second half of the year as part of the efforts being made to develop a deeper market and greater investment options, the BVL prepared a list of different securities ​​in the context of recent regulatory changes that allow Stockbroker companies and BVL itself register automatically Foreign Securities - including ETFs- in the Stock Market Public Registry of and the Stock Market Registry.

Thus, on July, August and December 2015, the BVL registered under this automatic listing mechanism a total of 52 new securities: 28 ETFs and 24 foreign shares. The securities ​​listed include ETF's from the US market index (S & P 500, Russell 2000, Nasdaq 100, Dow Jones Industrial) and European and Asian markets (Euro Stoxx 50, MSCI Germany, MSCI All Asia ex Japan, MSCI Japan); and currency and metals, among others. Also, the shares of companies from various sectors such as Apple Inc., Bank of America Corp. Facebook Inc, Nike Inc., Pfizer Inc. were registered, so that at the end of 2015 a total of 32 ETFs and 47 foreign shares were registered for trading in the Stock Exchange Sessions.

Economic environment

As for the evolution of the global economy, most analysts agree to say that during 2015 its performance was weak - some describe it as disappointing-, because many countries continued to suffer from high unemployment and high debt levels. While earlier this year the main multilateral agencies estimated that growth in the world economy would exceed 3.5%, the most recent projections indicate that such growth was around 3.0%, as a result from the combination of different factors.

A key element was the slowdown in the Chinese economy, which in 2015 reached an expansion of 6.9% (vs. 8.6% - average rate - of the previous five years). This setback decreased the demand for metals, oil and food, affecting their prices and reducing their investments abroad.

Another important aspect was the influence that generated the announcement of higher interest rates in the US and the expectation on when it would be implemented.

This added volatility to the markets, increasing aversion to risk, and strengthening the US dollar, which in turn had a negative impact on commodity prices.

This has especially harmed the commodity-exporting countries, including Russia (-3.7%) and Brazil (-3.8%), whose results contrast with the expansions achieved by Asian countries, in addition to the aforementioned expansion of China, highlighting the cases of India (+ 7.3%) and Indonesia (+ 4.8%) and the moderate growth achieved by the economies of the United States (+ 2.4%) and the United Kingdom (+ 2.2%).

In this scenario, it is estimated that Latin American countries as a whole decreased 0.3%, where the development of the Peruvian economy whose production reached a growth of 3.26% is remarkable, becoming the second highest increase in the region.

In this regard it should be noted the upward trend experienced by the GDP throughout the year, registering the first quarter a rate of 0.6%, then increasing and closing the fourth quarter with a 1.9% growth. From the perspective of aggregated demand, increased spending on private consumption (+ 3.4%) and government spending (+5.8) were important, while gross fixed investment decreased 6.6%.

Per activities, the momentum of GDP was sustained by the contribution of mining and hydrocarbons industries- with a 9.27% growth ​​- followed by Other Services (4.37%), Financial and Insurance (9.71%) and Trade (3.88%) that together contributed 2.6 points to the overall figure. The items that showed a deterioration in their transactions were Construction (-5.86%) and Manufacturing (-1.67%).

Inflation this year experienced a significant increase, reaching 4.40% - the highest rate since 2011-, which exceeds the target rate of Banco Central de Reserva (between 1% and 3%) for the second time. Consumer groups that had more impact on this result were Food and Beverages (5.37%), Rental Housing, Fuel and Electricity (7.75%) and Leisure, Fun, Cultural and Education Services (+ 4.3%).

One of the factors that contributed most to this increase in prices of the economy was the depreciation experienced by our currency, an event that was common globally due to the strengthening of the US dollar. Thus, the exchange rate- which ended at 2.98 soles on 2014 - began to increase moderately in the first half (3.16 soles in June),

recording a further increase in the second half of the year, to close at 3.41 soles.

As for monetary policy, Banco Central de Reserva changed the orientation of its instruments according to the situation. In January, to reduce the interest rate by 25 pbs (from 3.50% to 3.25%) was decided in response to the slowing economy and external factors; however this expansive regime changed in the last quarter. In September, the central bank raised the rate to 3.5% in order to moderate an increase in inflation expectations against the rising prices of some food and currency depreciation. Subsequently, in December, the BCR increased the rate to 3.75% due to increased inflation expectations, which were above the target range.