EU Regulator Warns of ‘Deteriorating’ Outlook for Asset Managers

Report says no-deal Brexit is biggest risk for European financial markets.

The European Securities and Markets Authority (ESMA), the European Union’s securities regulator, has published a report that identifies a “deteriorating” outlook for the asset management industry amid “very high market risk.”  The report says recent trade tensions have spurred renewed volatility, and that concerns over a no-deal Brexit remain key risk drivers for the second half of the year. 

According to the ESMA’s most recent Trends, Risks and Vulnerabilities (TRV) report for 2019, investors are facing very high market risk due to high valuations,  subdued economic growth prospects, geopolitical uncertainty and flattening yield curves.

The decoupling between equities and bond yields, together with the rapid rise in asset valuations could be a sign of investors’ complacency and underappreciation of market risks, the report said.

 The report warned that changing monetary policy expectations could lead to increased risk appetites as investors hunt for yield. As a result, investors may find that portfolios are more vulnerable to volatility.

The regulator is also concerned about the deteriorating quality of outstanding corporate debt coupled with the growth in leveraged loans and CLOs. ESMA called on “public authorities” to pay more attention to the pivot toward leverage.

 ESMA also took on the potential impact of a no-deal Brexit, noting that the possibility of the UK leaving the EU without a deal in place is the “most important source of political risk” for European financial markets. The regulator said that increasing trade-related risks, political uncertainty and the potential for deteriorating public finances could undermine the sustainability of the European recovery. “In this perspective, concerns over debt sustainability for sovereigns could hamper investors’ confidence and lead to a pullback in private investment,” the report said.

Economic expansion in the EU is expected to reach 1.4% in 2019, which is slightly below the European Commission’s winter projections. The euro area continues to grow at a moderate pace, with the GDP estimated increase revised downward to 1.2%, according to he report. The EU aggregate deficit reached 0.6% of GDP, its lowest level since 2000, however, budget deficits in the EU are expected to widen due to subdued economic growth. The global GDP outlook, excluding the EU, is expected to slow to 3.6%.

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