Geopolitical tensions are stoking market volatility, intensifying risks for investors and clouding the outlook for the asset management sector, European regulators warn.
In a new report, the European Securities and Markets Authority (ESMA) says that market risk is currently “very high” amid a range of factors, including “potentially inflated asset valuations, subdued economic growth prospects and flattening yield curves.”
Additionally, a shift in monetary policy expectations toward lower rates may boost investors’ risk appetites and “reignite search-for-yield strategies, leaving investors vulnerable to volatility episodes and abrupt shifts in market sentiment,” the report says.
The ESMA says that credit risk and liquidity risk also remain high, and that this is prompting a gloomier view of the asset management industry.
“While the level of credit risk is stable, the deteriorating quality of outstanding corporate debt, the growth in leveraged loans and collateralized loan obligations should warrant the attention of public authorities,” it says. “As a result, ESMA’s risk outlook for the asset management sector has deteriorated.”
In particular, the ESMA says that increased issuance of leveraged loans and CLOs in both the U.S. and Europe, coupled with looser underwriting standards, higher indebtedness and compressed credit spreads, represents “a potential vulnerability in the market.”
It adds that “recent trade tensions have triggered renewed volatility, and concerns over a no-deal Brexit remain key risk drivers for the second half of 2019.”