16 February 2022

ESMA warns consumers of risk of significant market corrections

The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator,
today publishes 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.

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.

Verena Ross, Chair, said:
“All investors should consider that the risk of market corrections remains acute. 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.”
“Retail investors are of particular concern to ESMA. 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.
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 realising the high risks involved.

The Report’s main findings are:
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.

ESMA

© ESMA