Securities market risks are high, and investors should be on guard against possible market corrections, the European Securities and Markets Authority (ESMA) is warning.
In its first risk report of the year, ESMA said that as global financial markets rise, the downside risks are growing too.
“Financial markets remain optimistic, but recent events show that confidence is fragile,” said Verena Ross, chair of ESMA, in a release. “The evolution of economic growth, global monetary policy and geopolitics remains uncertain, and this gives rise to key risk drivers.”
In particular, surging equity markets, driven by expectations of a deregulatory policy agenda, “underline the concerns over a decoupling of financial markets from economic realities,” the report said — adding that these market gains have intensified the risks of “drastic market corrections.”
The regulator also warned that contagion risk is “set to worsen given surging asset prices in a context of highly interconnected global markets.”
And, it said that recent record highs in crypto markets highlight the growing risks from “social-media-driven investing for investors with limited knowledge.”
“Market participants need to keep their eyes firmly on growing risks, from possible corrections in surging markets such as cryptos, to the threat of disruption from increasingly sophisticated and frequent cyber-attacks,” Ross said.
Debt sustainability is also a concern, ESMA said, with almost half (47%) of corporate bonds maturing in the next couple of years.
“Search-for-yield behaviour and excessive risk-taking by end investors could lead to pricing misalignments and to abrupt repricing when economic conditions change,” the regulator noted.
And, it said that hedge fund leverage remains high too.