Regulators are warning investors that there remains a high risk of significant market declines amid the ongoing economic fallout from Covid-19.
In its latest risk assessment report, the European Securities and Markets Authority (ESMA) said that, despite the rebound that followed the initial pandemic-induced plunge, markets remain “fragile.”
ESMA said that it sees “a prolonged period of risk to institutional and retail investors of further – possibly significant – market corrections.”
The report warned of a “potential decoupling” of financial market performance and underlying economic activity — noting that markets are up 40% from their lows in March, even as GDP is expected to tumble substantially this year.
As a result, the ESMA said, “the sustainability of the recent market rebound remains a concern.”
Alongside these immediate concerns, the report also noted that the pandemic-driven market turmoil highlighted the risks of market-wide stress, particularly for investment funds.
The regulator said that its research found “funds exposed to less liquid asset classes are more likely to be affected by shocks originating in other markets than funds invested in more liquid assets.”