The European Securities and Markets Authority (ESMA ) published a risk monitoring report on Tuesday, raising concerns of a market correction in 2022 due to the high risks among institutional and retail investors.
Overall, the macro-economic conditions continued to improve throughout the second half of 2021. However, the recovery of the financial markets within the European Union slowed down as the Covid-19 pandemic surged again by the end of last year, impacting the growth and market expectations.
Further, the agency pointed out that there is a scope for reducing the risk levels if the past improvements in the economic environment and the relatively low volatilities in the market prove to be resilient.
Moreover, the agency is concerned over the impact of the mounting geopolitical tensions in eastern Europe that are driving nervousness in the markets. Also, the rise of inflation in the US and Europe impacts the expectations of monetary policy.
Though, ESMA justified its prediction of a possible acute market correction citing that there were already two news-related sell-offs in the market in the second half of 2021. Additionally, the securities markets are overvalued due to elevated price-earnings ratios even though volatility was contained.
Risks of an Acute Correction
“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,” said Verena Ross, ESMA’s Chair.
“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 realizing the high risks involved.”
