The European Securities and Markets Authority (ESMA) has published the first Trends, Risks and Vulnerabilities (TRV) report for 2020 on 19th February 2020. Overall, the report identifies high risks and weak economic outlook.
Market risk remains high due to trade tensions, Brexit and uncertainty resulting from political tensions and the coronavirus outbreak which caused a decrease in market confidence and volatile exchange rates. In particular, trade tensions between the United States and China have caused high volatility in equity markets and bond spreads remained tight, suggesting a continued search for yield.
The report also identified consumer risks among investment products, highlighting retail investors’ caution through allocating savings into bank deposits, as markets risks increase causing weakened capital market participation. Gross performance for Undertakings for the Collective Investment in Transferable Securities (UCITS) improved, particularly for passive funds and Exchange Traded funds (ETFs).
ESMA’s report also notes risks posed by evolving markets, namely sustainable finance and financial innovation. An increase in sustainable finance involving the incorporation of sustainable measures into investment strategies is noted with increased popularity of green bonds and ESG assets. In the field of financial innovation, ESMA recognizes the potential risks posed by cryptoassets and BigTech firms.
The TRV provides a specific analysis of three key issues: