SP35: Everything you need to know about leading indices

The Ibex 35 is the domestic and international benchmark for the Spanish stock market and measures the share prices of the country’s 35 largest companies by market capitalisation.

Created with a base level of 3,000 in 1989 and inaugurated on 14 January 1992, the index is governed and supervised by the Sociedad de Bolsas. It calculates, publishes and disseminates this index in real time.

Part of Grupo Bolsas y Mercados Españoles (BME), it also manages the technical trading platform of the Spanish stock exchange market. Trading on options and futures contracts on the Ibex 35 is provided by Mercado Español de Futuros Financieros, another subsidiary of BME.

Unlike many other European benchmark indices, the weightings of companies in the Ibex 35 are not capped. According to research by the BME, Ibex 35 companies generated just 34% of their revenues from Spain in 2016 and a combined 46% of revenues were sourced outside the Eurozone.

The Ibex 35 reflects the behaviour of the Spanish stock market. Source: Shutterstock.com

What does it monitor?

The Ibex 35 has two functions: to reflect the behaviour of the Spanish stock market and to serve as the underlying asset in the trading, clearing and settlement of options and futures contracts linked to it.

It represents 90% of the cash traded on the Spanish stock exchange, making the sample sufficiently representative of the market and allowing it to effectively gauge the performance of the stock market for the past 25 years.

The return on the index between its first trading session when it closed at 2,676.12 basis points and today’s level of around 9,500 is 255%, leaving an average yearly return for the period of 6.82%.

It marked its lowest level in its first year, specifically on 5 October 1992, at 1,873.58 and it reached its highest level on 8 November 2007, when it closed at 15,945.70 basis points.

What stock markets does it cover?

The Ibex 35 measures the free float shares of the most liquid traded stocks, but it not subject to any specific sector diversification. Although many large companies that are regularly traded on the stock exchange with large daily trading volumes are part of the index, they are included because of their liquidity rather than size.

Financial and real estate service companies make up 35.87% of the index with oil and energy the second largest sector at 18.53%. Other sectors include basic materials, industry and construction (8.08%), consumer goods (13.40%), consumer services (9.34%) and technology and telecommunications (14.79%).

Banco Santander had the largest weighting in the Ibex last year. Source: Shutterstock.com

Who decides on the 35 companies?

Monitoring the index, as well as the review of its composition, is the responsibility of the Technical Advisory Committee. Every six months, the committee decides which companies will enter or leave the index, depending on various factors, such as liquidity, prices, capitalisation or number of shares.

In the half-yearly selection of the 35 most liquid securities, there are no minimum or maximum number of changes that can be made. There may be no changes at all or as many changes as deemed appropriate. It all depends on the liquidity measurements.

For a stock to be a candidate for inclusion on the Ibex 35 it must pass certain minimum tests. The first one establishes that  the average capitalisation of the security on the index must be more than 0.30% of the average total index capitalisation during the control period (this excludes small caps).

Once this test is passed, the second test establishes that the security has been traded in at least one third of the trading days during the control period. If it does not pass this test, the security could still be chosen if it were one of the top 20 securities by market capitalisation.

The various documents that are published by Sociedad de Bolsas, such as reports on liquidity, free float, betas and correlations, are the basic materials used by the members of the Technical Advisory Committee when they make their decisions.

Who are the leading firms in it or sectors?

Banco Santander had the largest weighting in the Ibex last year, but it made twice as much underlying profit in Latin America as in Spain, while Zara owner Inditex derived just 16% of its revenues from Spain in the first half of this year.

According to analysts, the telecommunications and utilities sectors are the main drivers of the Spanish 35 index. In its recent report on Spain, Goldman Sachs Global Investment Research said that while the telecoms sector (mainly represented by Telefónica) is very attractive for investors, “looming pressure on returns” is clouding investor interest in the utilities.

The latest company to join the index was Colonial. The real estate firm covered the vacancy in the index left by Banco Popular after it was acquired by Santander.

Colonial’s market capitalisation will be close to €3bn and it was last in the index nine years ago when it left at the height of the economic crisis and two years after Inmocaral, controlled by Luis Portillo, launched a takeover bid for the company in which, at the time, La Caixa owned a stake.

When were the biggest gains and falls?

During its 25 years, the most bullish year on the index was 1993 when its return was 54.20%, followed by 1996 when it rose 41.97%. The worst annual yearly results were in 2008 with a 39.43% decrease and 2002, when it lost 28.11%.

The most bullish day of the index was on 10 May 2010, with a rise of 14.43%, following a raft of measures on the euro taken by European institutions. The largest decline occurred on June 24, 2016 with a fall of 12.35% as a consequence of Brexit.

Secession would inflict a considerable toll on Spain. Source: Shutterstock.com

The Catalonia effect

Spanish stocks took a hit earlier this year due to fallout from an October referendum when Catalonia voted in favour of independence. Around 2.26 million people took part in the ballot, representing around 42.3% of Catalonia’s 5.34 million voters.

Secession would inflict a considerable toll on Spain because Catalonia accounts for 19% of its gross domestic product, according to the Economist Intelligence Unit. Catalonia’s output is higher than most eurozone countries at €212bn.

In the week following the announcement, the Ibex 35 stock market index lost 2% and dropped below 10,000 points for the first time since mid-2015. It has dropped approximately 3.5% since the end of September.

Analysts at Société Générale advised their clients in a note to stay away from Madrid-listed stocks, as “a combination of a minority government and the Catalan independence push might prevent Spain from making much-needed reforms, hence we remain shy of Spanish equities”.

Exposure of Ibex 35 companies

Société Générale did also acknowledge at the same time that the actual exposure of Ibex 35 companies to Catalonia is fairly minimal. Catalonia hosts 7,100 foreign companies, including Volkswagen, Nissan and Cisco, but some companies will be more exposed than others.

According to the Société Générale analysis, Banco Sabadell headquartered in Catalonia has approximately 20% of its credit risk in the region. It was among the biggest fallers on the index in October, down 1.5% to €11.60. BBVA is also estimated to have 14% of its credit risk in Catalonia.

Some major companies such as CaixaBank recently moved from Barcelona to Valencia. Source: Shutterstock.com

Other companies that have moved their headquarters out of Catalonia include Banco Sabadell, real estate company Colonial and energy supplier Gas Natural Fenosa.

The upcoming Catalan elections could prove another set-back for the Ibex 35 and analysts have stated that Spain’s economy is going to pay a price for Catalonia’s bid for independence.

Eurozone economist at Oxford Economics, Angel Talavera, said. “The economic impact of the Catalan independence crisis is still unknown, but the increased political tensions have already caused uncertainty to surge to the highest levels in over a decade.”