Financial markets remain extremely vulnerable to a substantial correction, European regulators warn in their latest risk report.
The European Securities and Markets Authority (ESMA) said it continues to see high risks to both institutional and retail investors of market weakness amid uncertain economic conditions and monetary policy prospects, which may recalibrate expectations for both economic growth and market valuations.
As a result, the ESMA said that it continues to see “high risks to investors of further — possibly significant — market corrections as markets remain nervous and geopolitical tensions are rising.”
“All investors should consider that the risk of market corrections remains acute,” said Verena Ross, chair of ESMA, in a statement. “This was demonstrated last year in two episodes of sell-offs largely driven by news first related to Evergrande and then to the resurgence of Covid-19. The markets remain highly volatile and ESMA sees growing uncertainty for investors going forward.”
While market turmoil would impact all investors, the regulator indicated that it’s particularly concerned about retail investors.
“Their participation in financial markets has increased substantially in recent years, with new investors taking advantage of the convenience and user-friendly features of mobile trading platforms,” Ross said. “This diversification offers opportunities but also comes with risks, and ESMA remains concerned about risks to retail investors who buy assets with expectations of significant price growth, and without realizing the high risks involved.”
In its report, ESMA also included environmental risk as a fundamental risk category for the first time, reflecting its growing importance to financial markets.