The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, published the first Trends, Risks and Vulnerabilities (TRV) Report of 2022 and, in its outlook for 2022, continues to see high risks to institutional and retail investors of further, possibly significant, market corrections.
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The pandemic’s resurgence at the end of 2021 and an uncertain economic and monetary policy outlook are leading market participants to revisit their growth and market expectations. Going forward, we continue to see high risks to investors of further – possibly significant – market corrections as markets remain nervous and geopolitical tensions are rising.
Market environment: Macroeconomic conditions continued to improve through the second half of 2021, although the impact of a new wave of the pandemic on the economic outlook is unclear at this stage.
Securities markets: The increase in global equity prices continued, and while volatility remained low, elevated price earnings ratios pointed towards potential overvaluation concerns. Energy commodity prices were particularly volatile, highlighting the potential financial risks associated with the energy transition and Europe’s climate policy objectives.
Asset management: Investment fund markets continued to grow, particularly with inflows into equity funds. Risks remained elevated, both in terms of liquidity risk and credit risk, while higher inflation expectations raise new concerns in relation to duration risk. Funds investing in assets protected against inflation, such as commodity funds, benefitted from increased flows.
Sustainable finance: The growth of ESG markets remained steady as investors continued to increase their investments in sustainable products. ESG fund assets increased by 9% in the second half of 2021, while ESG bond markets grew by 19%. Concerns over possible green asset overvaluation lingered.
Financial innovation: Crypto Asset markets reached new records with a peak at EUR 2.6tn in November, fuelled by investor appetite for riskier assets and growing institutional adoption. Stablecoins and DeFI continued to expand rapidly, and with them concerns over the resilience of business models as well as high product and market risks investors take. ■