ANNUAL REPORT ON CMVM’S ACTIVITY AND ON THE SECURITIES MARKET

2015

CMVM

TABLE OF CONTENTS

TABLE OF CONTENTS 2

LIST OF TABLES 6

LIST OF CHARTS 10

LIST OF TEXTBOXES 17

1. SECURITIES MARKET IN 2015 18

1.1. SHARES AND BONDS MARKET 18

1.1.1. International Financial Markets 18

1.1.2. and Bonds Markets in the 46

1.2. MARKETS 57

1.3. INVESTMENT FUNDS 74

2. THE PORTUGUESE SECURITIES MARKET 83

2.1 OVERALL DEVELOPMENTS IN THE SECURITIES MARKET AS A DESTINATION OF FINANCIAL INVESTMENT 83

2.1.1. Stock Market Development 83

2.1.2. Profitability and Attractiveness of the Securities Market 92

2.1.3. Evolution of the Relative Importance of the Securities Market 96

2.2 OVERALL DEVELOPMENTS IN THE SECURITIES MARKET AS A FUNDING SOURCE 103

2.2.1. Domestic Market 103

2.2.2. Comparison between the Domestic Market and Other European Markets 113

2.3 SECURITIES’ ISSUES 116

2.3.1 Shares 116

2.3.2 Bonds 117

2.3.2.1. Private Debt 117

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2.3.2.2. Government Debt 119

2.3.3. Complex Financial Products 121

2.4 THE SECONDARY MARKET 123

2.4.1. Spot Market 123

2.4.1.1 Market Capitalisation 123

2.4.1.2 Trading 125

2.4.1.2.1 128

2.4.1.2.2 MTS 131

2.4.1.2.3 PEX 131

2.4.1.2.4 Trading Listings and Delistings 132

2.4.2. Forward Market 133

2.4.2.1. Futures and Options Market 133

2.4.2.2. MIBEL Derivatives Market 134

2.4.3. Centralised Securities System 137

2.4.4. Public Offers of Securities 138

2.4.4.1 Takeover bids 138

2.4.4.2 Public Offerings 139

2.4.4.3 Advertising of Public Offerings 140

2.4.4.4 European Prospectus Passport 140

2.5 FINANCIAL INTERMEDIATION 141

2.5.1. Receipt of Orders on behalf of Third Parties 141

2.5.2. Execution of Orders on behalf of Third Parties 143

2.5.3. Trading on own Account 145

2.5.4. Day-Trading 146

2.5.5. Registration and Deposit of Financial Instruments on behalf of Third Parties 147

2.6 ASSET MANAGEMENT 149

2.6.1. Individual Portfolio Management on behalf of Third Parties 149

2.6.2. Undertakings for Collective Investment in Securities and Alternative Funds 152

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2.6.3. Investment in Foreign Collective Investment Undertakings Marketed in 161

2.6.4. Real Estate Investment Funds 162

2.7 CREDIT SECURITISATION 166

2.8 VENTURE CAPITAL 169

3. SUPERVISION AND REGULATION 172

3.1. INTEGRITY, CREDIBILITY AND SECURITY OF THE SECURITIES MARKET 172

3.1.1. Supervision of Markets, Market Managers and Clearing and Settlement Systems 172

3.1.1.1. Supervision of Trading Structures 172

3.1.1.2. Supervision of Trading 177

3.1.2. Supervision of Issuers of Listed Securities 179

3.1.2.1. Supervision of Financial Information 179

3.1.2.2. Disclosure of Financial Information 180

3.1.2.3. Qualifying Holdings and Rebut of Presumption 182

3.1.2.4. Corporate Governance 183

3.1.3. Supervision of Financial Intermediation 184

3.1.3.1. On-Site Supervision 184

3.1.3.2. Off-Site Supervision 186

3.1.3.3. Supervision of the Financial Analysis 189

3.1.4. Supervision of the Asset Management 190

3.1.4.1. Portfolio Management on Behalf of Third Parties 190

3.1.4.2. On-site supervision of UCITS, Securitisation of Credits and Venture Capital 191

3.1.4.3. Off-Site Supervision 193

3.1.5. Registrations and Authorisations 200

3.1.5.1. Operations 200

3.1.5.2. Asset Management 202

3.1.5.3. Other Aspects of Financial Intermediation 205

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3.1.5.4. Real Estate Appraisers 206

3.1.5.5. External Auditors 206

3.1.6. Litigation 208

3.1.6.1. Administrative Offences Litigation 208

3.1.6.2. Non-Administrative Offence Litigation 214

3.1.7. Investigation and Market Crimes 216

3.2. PROTECTION OF INVESTORS AS SAVERS AND CONSUMERS OF FINANCIAL SERVICES 230

3.2.1. Complaints 230

3.2.2. Information Requests 234

3.2.3. Information Disclosure System (SDI) 236

3.2.4. Supervision of the Marketing of Financial Products and Advertising for Financial Instruments 236

3.2.5. Financial Literacy 238

3.3. REGULATION OF THE PORTUGUESE FINANCIAL MARKET 239

3.3.1. Concluded Legislative and Regulatory Reforms and Key Implications 239

3.3.2. Legislative reforms in progress 247

3.3.3. National Coordination of Supervision and Promotion of Financial Stability 253

3.4. INTERNATIONAL ACTIVITY 255

3.4.1. Participation in International Bodies 255

3.4.1.1. Participation in ESMA 256

3.4.1.2. Participation in IOSCO 264

3.4.1.3. Participation in the European Systemic Risk Board 266

3.4.2. Regulators’ College 267

3.4.2. Further International Participation 269

4. CLOSING REMARKS 271

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LIST OF TABLES

Table 1 – MSCI Shareholder Indices (Index Changes) ...... 18

Table 2 – Macroeconomic Indicators ...... 28

Table 3 – Macroeconomic Projections ...... 30

Table 4 – Money Supply in the ...... 32

Table 5 – Interest Rates Charged to Non-Financial Companies (%) ...... 35

Table 6 – Market Capitalisation of European Stock Markets ...... 49

Table 7 – Derivative Contracts Trading by Region ...... 58

Table 8 – Derivative Contracts Traded, by Underlying Asset...... 59

Table 9 – Trading Volume of the Main Derivative Contracts by Type of Underlying Asset .... 63

Table 10 – The Top Ten Derivative Exchanges ...... 64

Table 11 – Net Subscriptions of Harmonized and Alternative Collective Investment Undertakings by Type of Fund in 2015 ...... 80

Table 12 – Relative Bid-Ask Spread (Average) of PSI20 Shares ...... 90

Table 13 – Profitability and Risk of Various Types of Financial Instruments ...... 92

Table 14 – Share Capital Profitability, Distribution and Retained Dividends ...... 95

Table 15 – Change in Financial Assets ...... 97

Table 16 – Relative Weight of the Securities Market vis-à-vis Term Deposits and Savings and Treasury Certificates ...... 102

Table 17 – Changes in Financial Liabilities and Net Worth ...... 103

Table 18 – Sources of Investment Financing by Scale of Workforce (%) ...... 107

Table 19 – Investment Limiting Factors (%) ...... 108

Table 20 – Financing Structure of the Change in Assets of Listed Companies ...... 111

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Table 21 – Relative Development of Stock Market Capitalisation ...... 112

Table 22 – Shares Issued by Listed Publicly Traded Companies, by Type of Share ...... 116

Table 23 – Placed Amounts of Treasury Bonds ...... 120

Table 24 – Maturity and Weighted Rates of Treasury Bonds ...... 120

Table 25 – Maximum Issue Amount and Amount Placed of Complex Financial Products ..... 121

Table 26 – Maximum Issuance Amount and Amount Placed of Complex Financial Products With and Without Capital and Return Guarantee ...... 122

Table 27 – Concentration Indicators in the Marketing of CFP...... 123

Table 28 – CFP Colour Warning Code ...... 123

Table 29 – Stock Market Capitalisation ...... 124

Table 30 – Value of Transactions in the Secondary Spot Market ...... 125

Table 31 – Liquidity Indicators for Shares Admitted to ...... 129

Table 32 – Turnover by Market Segment ...... 130

Table 33 – New Securities Listings and Delistings in the Different Forms of Trading of Euronext Lisbon ...... 132

Table 34 – Trading in Futures Contracts ...... 133

Table 35 – Securities Integrated in the Central Securities Depository ...... 137

Table 36 – Takeover Bids in 2015 ...... 138

Table 37 – Public Offerings ...... 139

Table 38 – Approval of Advertising for Offerings ...... 140

Table 39 – Value of Orders Received on behalf of a Third Party, by Type of Investor ...... 143

Table 40 – Transactions Executed by Market Type ...... 144

Table 41 – Day-Trading Aggregate Data ...... 147

Table 42 – Distribution of Day-Trading (External Portfolios) by Channel and Type of Investor ...... 147

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Table 43 – Registration and Deposit: Holders By Type of Security ...... 148

Table 44 – Structure of the Portfolio of Real Estate Investment Funds ...... 162

Table 45 – Structure of the CSF Portfolio ...... 167

Table 46 – Assets Under VCC Management, by Type of Investments ...... 169

Table 47 – Assets Under VCF Management, by Type of Investments ...... 170

Table 48 – Investment Portfolio of VCF and VCC by Investment Phase ...... 171

Table 49 – Matters Analysed in the On-Site Supervision Actions of Financial Intermediation Activities (excluding Portfolio Management)...... 185

Table 50 – Matters Analysed in the On-Site Supervision Actions of Portfolio Management Activities for Third Parties ...... 191

Table 51 – On-site Supervision Actions ...... 192

Table 52 – Auditors Reports concerning the Accounts of Securities and Real Estate Funds 198

Table 53 – Registration of Operations/Approvals of Prospectuses (number) ...... 201

Table 54 – Administrative Processes of Investment Funds in 2015 ...... 203

Table 55 – Issues of Securitized Bonds ...... 204

Table 56 – Number of Financial Intermediaries Registered with the CMVM ...... 205

Table 57 – Register of Real Estate Appraisers ...... 206

Table 58 – Register of External Auditors - Verified Facts ...... 207

Table 59 – Administrative Offence Proceedings in 2015 ...... 209

Table 60 – Non-Administrative Offence Litigation in 2015 ...... 215

Table 61 – Reports and Opening of Administrative Offence Proceedings ...... 222

Table 62 – Total Registered Complaints by Entity...... 231

Table 63 – Complaints By Type of Financial Instruments...... 232

Table 64 – Settled Complaints made against Financial Intermediaries ...... 233

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Table 65 – Number of Communications Issued/Inserted on the CMVM Website ...... 236

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LIST OF CHARTS

Chart 1 – MSCI Share Indices (left) and Exchange Rate (right) ...... 19

Chart 2 – PER of the Main World Indices ...... 20

Chart 3 – Companies’ Profits - Financial Analysts’ Forecasts ...... 21

Chart 4 – Percentage Deviation Between Actual Profits and Financial Analysts’ Forecasts (One-Year Estimates - left and Three-Year Estimates – right)...... 22

Chart 5 – Operating margin (left) and Payout Ratio (right) ...... 22

Chart 6 – EPS (left) and Dividends (right) of World Indices (Index = 100 in 2004) ...... 23

Chart 7 – Earnings Yield of European Indices (left) and of World Economic Blocks (right) ... 23

Chart 8 – Adjusted PER: Ten-Year Moving Average (CAPE) and Non-Observable Components (CAPE-UCM) ...... 24

Chart 9 – Structural and Cyclical Profits - Non-Observable Components ...... 24

Chart 10 – Gap between the Cumulative Rate of Return of Share Markets and of 10-Year Government Bonds (left) and the Earnings Yield of Share Indices and 10-Year Government Bond Yields (right) ...... 26

Chart 11 – Public Share and Bond Offerings ...... 27

Chart 12 – Economic Sentiment and Consumer Confidence ...... 29

Chart 13 – IMF forecasts for Real GDP Growth in 2016 (left) and IMF Forecast Errors for Real GDP Growth in 2015 (Real minus Forecast) (right) ...... 30

Chart 14 – Level of Surprise vis-à-vis the Publication of Economic Indicators ...... 31

Chart 15 – Time Structure of the Euribor Interbank Market Rates ...... 33

Chart 16 – Evolution of 3-month Short-term Interest Rates (left) and Internal Rate of Return of the 10-year Government Bond Index (right) ...... 34

Chart 17 – Stock of Credit by Banking Institutions to Non-Financial Companies (Billion ) ...... 35

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Chart 18 – Overdue Credit in terms of Bank Loans ...... 36

Chart 19 – Paid on 90-Day Commercial Paper Issues (left) and Average Internal Rate of Return (IRR) of Bonds by Risk Class (right) ...... 37

Chart 20 – Internal Rate of Return of Bonds by Risk Class - Eurozone ...... 37

Chart 21 – 5-Year CDS Premiums by Risk Class (left) and CDS Indices for the European Corporate Sector (right) ...... 38

Chart 22 – 5-Year Sovereign CDS Premiums ...... 39

Chart 23 – Credit Risk Premium for Portuguese Treasury Bonds Compared to German Treasury Bonds ...... 40

Chart 24 – Liquidity of Financial Markets (left) and Liquidity Risk (right) ...... 41

Chart 25 – Liquidity in Government Bond Markets (left) and Shareholders (right) ...... 42

Chart 26 – Historical and Implicit Volatility ...... 44

Chart 27 – Cumulative Yield and Co-Movement of Securities of the Financial Sector in the Eurozone (left) and Co-Movement of the Series of Yields of Government Bonds, Private Bonds, Share Indices, Exchange Rates, Metal Indices and Other (right) ...... 45

Chart 28 – Westpac (left) and Sentix (right) Financial Stress Indicators ...... 45

Chart 29 – Annual Variation of Main Share Indices of European Securities Markets ...... 47

Chart 30 – Development of Sectorial Indices with Best and Worst Performances in 2015 (Eurostoxx600) (left) and Dispersal of 19 Sectoral Indices of Eurostoxx 600 (right) ...... 48

Chart 31 – Amount Issued and Number of New Share Issues in Europe ...... 50

Chart 32 – Value of IPOs in Europe (2015), by Issuer Country (left) and Activity Sector (right) ...... 50

Chart 33 – Amount Traded in Shares (Market share) (left) and Off-Book Trading Weight in Shares (% of traded value) (right) ...... 51

Chart 34 – Bond Indices ...... 52

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Chart 35 – Private Bond Indices in Europe, By Credit Rating (left) and Sector (right) ...... 53

Chart 36 – Total New Bond Issues in Europe (left) and Issues of the High Yield Segment (right) ...... 53

Chart 37 – Traded Value in Bonds on European Union Stock Exchanges (Market Share) ..... 54

Chart 38 – Spread Between the 10-Year and 2-Year Government Bond Yield (left) and 10- Year Government Bond Yield (right) – as % ...... 55

Chart 39 – CISS (left) and SovCISS (right) Indicators for the Eurozone ...... 56

Chart 40 – Global Aversion to Risk (left) and Probability of Simultaneous Default of Two or More Banking and Sovereign Debt Issuers (right) ...... 56

Chart 41 – Number of Derivative Contracts Traded...... 58

Chart 42 – Derivatives on Share Indices, Volatility and Spot Price of the Underlying Asset . 60

Chart 43 – Cumulative Maximum Loss of Commodity Indices (left) and Co-movement of Prices of Commodity Indices (right) ...... 61

Chart 44 – Prices on the ICE (left) and Spreads of M1-M12 and M1-M2 Futures Contracts (right) ...... 62

Chart 45 – Notional Value of the OTC Derivatives Market ...... 64

Chart 46 – Market Share in Notional Value by Derivative Category ...... 65

Chart 47 – Assets Under Management of Harmonised and Alternative Collective Investment Undertakings ...... 76

Chart 48 – Assets Under Management of Collective Investment Undertakings ...... 78

Chart 49 – Change in the Value of Assets Under Management of Collective Investment Undertakings ...... 78

Chart 50 – Comparative Relevance of Collective Investment Undertakings ...... 81

Chart 51 – PSI20 and PSI20 TR Indices (left) and Correlation between the Yields of the PSI20 and International Indices (right) in Monthly Windows ...... 84

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Chart 52 – Annual Change in Shares Prices (left) and PER (right) - Companies of the PSI20 ...... 85

Chart 53 –CAPE and Structural Profit of PSI20 - Ten Year Moving Average (left) and Net Present Value of Growth Opportunities as % of Shares Price (right) ...... 86

Chart 54 – Price to Book Ratio of PSI20 Companies ...... 87

Chart 55 – Profitability, Volatility and Transactions of the PSI20 ...... 88

Chart 56 – Volatility and Correlations of Securities that Integrate the PSI20 Index (left) and Correlation between the Volatility of the Profitability Rates of the PSI20 and International Indices in Monthly Windows (right) ...... 89

Chart 57 – Value-at-Risk of the 10-day PSI20 TR ...... 89

Chart 58 – Bid-Ask Average Spread of Securities that Integrate the PSI20 and Main Components (Normalized Values) ...... 91

Chart 59 – Bid-Ask Spread, Amihud Indicator, Capital Turnover, and Transactions Value (Turnover) ...... 91

Chart 60 – Accumulated Return of Various Financial Investments ...... 93

Chart 61 – Financial Instruments in Total Financial Assets Held (%, Portugal) ...... 98

Chart 62 – Financial assets (as a percentage of GDP) – Eurozone ...... 99

Chart 63 – Financial Instruments in Total Financial Assets Held (%, Eurozone) ...... 100

Chart 64 – Net Subscriptions of UCITS and Insurance Products vs Term Deposits, Savings and Treasury Certificates ...... 101

Chart 65 – Financial Instruments in Total of Financial Liabilities Held and Net Worth (%, Portugal) ...... 104

Chart 66 – Financial Liabilities and Net Worth (as a percentage of GDP) – Eurozone ...... 105

Chart 67 – Weight of Certain Financial Instruments In Total Liabilities and Net Worth - Eurozone ...... 106

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Chart 68 – Private Individuals - Financial Liabilities (as a percentage of GDP) (left) and Weight of Loans in Total Liabilities (right) in the Eurozone...... 106

Chart 69 – Financing of New Investment in Portugal ...... 107

Chart 70 – Interest paid as % of Financing Obtained - Non-Financial Corporations ...... 108

Chart 71 – Ratio Between EBITDA and Interest Paid and Ratio Between EBITDA and Sum of Equity and Financing Obtained (left), and Ratio Between Profit and Equity (right) ...... 109

Chart 72 – Banking Sector Credit (Other Monetary Financial Institutions) to Non-Financial Corporations ...... 110

Chart 73 – Book value of Debt as a Percentage of the Market Value of Equity (left) and the Book Value of Equity (right) - Non-Financial Companies ...... 113

Chart 74 – Cash Resources and EBITDA (as percentage of Assets) ...... 114

Chart 75 – Annual Evolution of Tobin-q and the Fixed Charge Coverage Ratio (Listed Non- Financial Corporations) ...... 115

Chart 76 – Value of Bond Issues (left) and Bond Issues by Type (right) ...... 117

Chart 77 – Weighted Average Rate of 1st Coupon and 6-Month Euribor ...... 119

Chart 78 – Trading in the Spot Market in 2015 - Amount (left) and Percentage (right) ...... 126

Chart 79 – Weight of Platforms in the trading of PSI20 shares - % of Traded Value (left) and Trading Weight in Regulated Market in Several European Markets (right)...... 127

Chart 80 – Orders Executed as Percentage of Total Orders - PSI20 Shares ...... 130

Chart 81 – Evolution of Trading in the MIBEL Forward Market (left) and Price of Futures Contract of the Month of December 2015 in the Forward Markets (right) – 2015 ...... 135

Chart 82 – PTEL and SPEL in the Spot Market (€/MWh) – 2015...... 136

Chart 83 – Securities Received by Securities (left) and Derivative Financial Instruments (right) ...... 142

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Chart 84 – Orders Executed by Type of Security (left) and by Financial Derivative Instrument (right) ...... 144

Chart 85 – Trading on own account by type of security (left) and by derivative financial instrument (right) ...... 146

Chart 86 – Registration and Deposit: Concentration ...... 148

Chart 87 – Value Under Management and Number of Portfolios Managed (left) and Portfolio Value Average (right) by Type of Manager ...... 149

Chart 88 – Value Under Management and Number of Portfolios (left) and Portfolio Value Average (right) by Type of Customer ...... 150

Chart 89 – Concentration of Value Under Management by Entity (left) and Average Value of the Portfolio (right) ...... 151

Chart 90 – Composition of Managed Portfolios (left) and Transactions carried out (right) on account of Third Parties ...... 151

Chart 91 – Origin of Instruments Representing Private (Left) and Public Debt (right) ...... 152

Chart 92 – Value Under Management by Category (left) and Type of UCITS (right) ...... 153

Chart 93 – Net Investment Balance in Collective Investment Undertakings and Alternative Investment Funds in Portugal (left) and Type of UCITS (right) ...... 153

Chart 94 – Structure of the Portfolio of UCITS (left) and AIF (right) ...... 154

Chart 95 – Origin of Instruments Representing Private (Left) and Public Debt (right) ...... 154

Chart 96 – Liquidity in the UCITS and AIF Portfolio ...... 159

Chart 97 – Number of Investors in Investment Funds (left) and Average Value per Investor (right) ...... 160

Chart 98 – Amount invested by Type of Investor and by Investment Fund ...... 160

Chart 99 – Aggregate Indicators of Foreign UCITS (left) and Value Placed by Dominant Assets (right) ...... 161

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Chart 100 – Credit Securitisation Amount under Management ...... 167

Chart 101 – Variations by Type of CSC and CSF balance sheet items (left) and Creditors by Institutional Sector and Originators of Credits Taken by MFIs (right) ...... 168

Chart 102 - Supervision of Financial Information - Number of Issuers (left) and Action Taken (right) ...... 179

Chart 103 – Auditors' Opinion ...... 182

Chart 104 – Requests for Information sent to the CMVM ...... 234

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LIST OF TEXTBOXES

BOX 1 – THE RELEVANCE OF NON-FINANCIAL COUNTERPARTIES IN THE TRADING OF OTC DERIVATIVES ...... 66

BOX 2 – THE RATING AND COUPON RATE OF BONDS HELD BY SECURITIES INVESTMENT FUNDS ...... 155

BOX 3 – COMMISSIONS CHARGED BY REAL ESTATE INVESTMENT FUNDS...... 163

BOX 4 – JUDICIAL DECISIONS IN 2015: ADMINISTRATIVE OFFENCES ...... 210

BOX 5 – JUDICIAL DECISIONS IN 2015: ADMINISTRATIVE OFFENCE LITIGATION ...... 215

BOX 6 – MARKET ABUSE INVESTIGATIONS RELATED TO BES AND ESFG ...... 217

BOX 7 – DECISIONS OF JUDICIAL AUTHORITIES IN 2015: CRIMES OF ABUSE OF PRIVILEGED INFORMATION AND MARKET MANIPULATION ...... 224

BOX 8 – COLLABORATIVE FINANCING (CROWDFUNDING) LEGAL SCHEME ...... 244

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1. SECURITIES MARKET IN 2015

1.1. SHARES AND BONDS MARKET

1.1.1. International Financial Markets

Most stock markets in 2015 maintained the appreciation trend observed the previous year. The MSCI World global index appreciated by 6.6% when prices are expressed in Euros and fell by 4.3% when measured in USD. This fact reflects the impact of the devaluation of the euro against the US dollar. The group of developed markets achieved appreciation higher than that recorded for the world index, which means that the increase of prices in the group of emerging and developing markets was generally lower than in other markets. The more significant increase of prices in developed markets contributed to support the redirection of capital to Western markets, which had already become apparent over the previous two years.

Table 1 – MSCI Shareholder Indices (Index Changes)

Source: Bloomberg; CMVM calculations. Note: The Pacific index includes Japan.

The evolution of stock markets was not homogenous. The market indexes for the trading platforms of the Far East and the Pacific had the highest appreciation while those of Latin America were the worst performing, as share prices of South American companies fell for the third consecutive year. In most emerging economies, particularly in oil-exporting countries, share prices dropped significantly in the last quarter of the year. This decline was sharper in the energy and commodity sectors and was associated with the evolution of the price of raw materials. The North American index had its lowest appreciation of the last four years while share prices in the European market continued to show positive growth, higher than in the previous year. The Eurozone index appreciated above the general European index, which has been the case in three of the last four years.

Chart 1 – MSCI Share Indices (left) and Euro Exchange Rate (right) (Year-End Values; Base = 100 in 2005)

Source: Bloomberg; CMVM calculations. Note: (i) Share index prices are expressed in euro; (ii) The Pacific index includes Japan.

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The evolution of the MSCI World index over a longer time horizon allows us to identify the continued recovery of prices in stock markets compared with the figures recorded after the 2008 crisis. The world index increased by 76.0% between the end of 2009 and 2015 (corresponding to an average annual variation of about 9.9%). The recovery of share prices in North America was significantly higher than that in Europe.2 The intensity of the 2008 financial crisis is evident in the fact that share prices in the Eurozone, the Pacific region and the Far East only surpassed the 2005 year-end figures in 2015.

The price earnings ratios (PER) of the major world indices increased over the last twelve months and, with the exception of the S&P 500, achieved values above 20 at the end of the year. The most notable increases were achieved by the FTSE 100 and the MSCI Europe, with both indexes reaching the highest levels of the last five years. Historically, indices that are mostly composed of companies from traditional industries (such as the S&P 500) register PER values that are substantially lower than indices composed of companies of the most innovative sectors and of sectors with the highest growth prospects (such as the NASDAQ 100). It is therefore equally important to analyse this indicator in the light of historical average. The PER for 2015 was higher than its ten-year average, except in the case of the NASDAQ 100. This means that the recent growth of prices was generally higher than the growth of companies’ profits, which may indicate a certain overvaluation of share prices.

Chart 2 – PER of the Main World Indices

End of Quarter Values PER Average 2015 vs PER 10-Year Average

Source: Bloomberg; CMVM calculations.

2 Changes measured in euro.

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The evolution of the PER of the indices reflects changes in the growth expectations of corporate profits, changes in the policy of dividends distribution (including share repurchase programs) and the cost of capital. It is common to use financial analysts' estimates as a consensus indicator regarding the future prospects of corporate profits, since there is no direct way to measure the first of these variables. Those forecasts are positive for forthcoming years, particularly for 2016 and for the companies of the IBEX and S&P 500 indices. The average annual growth rate of profits forecast for the next three years ranges from 3.9% (DAX) to 8.4% (IBEX), so a significant part of the value of the companies that make up the main European and North American indices derives from their growth opportunities.

Chart 3 – Companies’ Profits - Financial Analysts’ Forecasts

(%)

Source: Bloomberg; CMVM calculations.

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Chart 4 – Percentage Deviation Between Actual Profits and Financial Analysts’ Forecasts (One- Year Estimates - left and Three-Year Estimates – right)

(%) (%)

Source: Bloomberg; CMVM calculations.

However, retrospective analyses have shown that those estimates tend to be too optimistic. In most cases, the estimates are lower than the profits actually achieved or, when higher, the deviations are small. Hence, the possibility that the profits of companies may grow in forthcoming years at rates lower than anticipated by analysts, or even stagnate, cannot be ruled out. This could lead to a correction of price trajectories.

The evolution of distributed dividends can also influence the PER. The average payout ratio of the last six years for the analysed indices ranged from 40.5% (S&P 500) to 70.4% (IBEX). IBEX was the only index registering a reduction of this ratio in 2015. In the case of the companies included in the FTSE 100, the dividends distributed in the year were higher than profits so, in theory, the share prices of these companies will have more limited growth potential, especially since their operating margin continues to decline.

Chart 5 – Operating margin (left) and Payout Ratio (right)

(%) (%)

Source: Bloomberg; CMVM calculations.

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The operating margin (ratio of operating results to revenues) of the main indices declined in 2015, continuing a downward trend that dates back at least to the beginning of the decade. It can be deduced, as an indicator of the ability of a company to remunerate its shareholders and creditors, that the ability of companies to generate profits in forthcoming years is limited by the general decrease in respective operating margins. Accordingly, not only will the evolution of aggregate demand play a decisive role in the future profits of the companies, but it may also endanger the sustainability of recent growth of share prices.

Earnings per share (EPS) show that the S&P 500 recorded the best performance among the analysed indices, with 70% growth from 2004. The growth trajectory of this index is also less volatile than others, with the growth trend of the respective profits interrupted in 2007 due to the start of the financial crisis. In the final quarter of 2015, only the S&P 500 and NIKKEI 225 reported higher profits than those reg