The European Securities and Markets Authority (ESMA) published its first risk monitoring report of 2024, where it sets out the key risk drivers currently facing financial markets.
Verena Ross, ESMA’s Chair, said in a statement: “At ESMA we are observing a financial system that has shown a high level of resilience. Looking ahead, markets are set to remain very sensitive and risks of market corrections continue to be high, given geopolitical and macro-financial uncertainty. In this context, maintaining trust in financial markets is of particular concern to ESMA, and key to achieving our mission to protect investors.
“Retail investors increasingly get their updates through social media, and we again stress the need to be aware of the risk of receiving false or misleading information through these media. All investors should verify the reliability and the quality of the information they use in their investment decisions.
“Financial stability and investors will be impacted by increased interest rates which are expected to remain higher for longer. This environment has a negative impact on credit quality and real estate valuations. Finally, greenwashing entails the risk of limiting the role finance can play in the transition to a more sustainable future.”
Beyond the risk drivers, ESMA’s report provides an update on structural developments and the status of key sectors of financial markets, during the second half of 2023.
In a segment on market-based finance, ESMA noted that access to capital markets for European corporates continued to be mainly through fixed income markets and securitized products in H2 2023. Equity primary markets slightly picked up, but IPO activity was strained due to uncertain market conditions. Corporate bond issuance remained strong during 2H23. The corporate bond outlook will be shaped by a significant upcoming maturity wall from 2024 until 2028, with corporate debt sustainability remaining a considerable risk, especially in lower quality segments.
In asset management, ESMA said that EU fund performance and flows were volatile in the second half of last year. Investors preferred fixed income funds over equity funds, and money market funds specifically attracted significant inflows on higher interest rates and the inversion of the yield curve.
Overall, risks stabilized but remained elevated, especially liquidity and credit risk. While funds managed the transition to higher interest rates, concerns remained regarding the valuation of real-estate fund assets in a falling market.