The AMF publishes its 2022 Markets and Risk Outlook

The combined effects of the Russian invasion of Ukraine and the resurgence of the health risk, particularly in China, have adversely affected the environment of financial markets and growth prospects, while exacerbating the inflationary pressures that appeared during the post-Covid recovery. During the first few weeks of the conflict, the prices of certain commodities (energy, grains and metals) were multiplied by two or even three, and volatility increased. Margin calls reached unprecedented levels on markets that mostly involve non-financial market participants, with concern over their ability to honour them. The nickel market closed temporarily for the first time in its history, and all the transactions executed on 8 March 2022 had to be cancelled.

In this context of inflationary pressures which could persist, the major Western central banks were forced to accelerate the normalisation of their monetary policy and put an end to the low-interest-rate environment. Inflation has indeed reached record levels with +8.6% year-on-year in May 2022 in the US and +8.6% in June 2022 in the Eurozone.

Asset prices have undergone a sharp correction since the start of 2022: at the end of June 2022, the CAC 40 (dividends reinvested) has lost around 15% relative to its level at the end of 2021, but prices remain volatile and valuations are still high in certain segments. A steep market correction can therefore still not be ruled out. As a consequence of rising interest rates, and in light of debt levels, the risk of insolvency could also increase for companies, especially in sectors with high energy consumption.

Asset management was very resilient to the impact of the sanctions applied by the international community against Russia and its ally Belarus, as well as to the countermeasures adopted by Russia. French funds held few Russian securities before the start of the war, but the sanctions have nevertheless made it extremely difficult to value certain assets.

The AMF also observes that the leverage levels of alternative investment funds remain limited and do not require the effective application of Article 25 of the Alternative Investment Fund Managers Directive (AIFMD), which now enables competent authorities to cap leverage in cases of excessive risk taking.

The end of accommodative monetary policy will have consequences for the valuation of all portfolio securities. Against a background of rising interest rates, bond funds and money market funds could post a decline in performance going hand-in-hand with portfolio reallocations. Real estate funds are affected by a whole range of risk factors related to tensions in the residential real estate market but also in the commercial real estate market, heavily impacted by the Covid pandemic. Moreover, the past year confirmed the growth of leveraged finance, whose assets under management, also driven by the growth in private equity funds, reached levels similar to those seen before the 2008 crisis.

Market infrastructures were very resilient to incidents such as the flash crash of early May 2022, reflecting the satisfactory operation of circuit breakers. However, a high level of cyber risk persists for financial market participants in the context of the Ukraine war.

One major challenge remains that of financing the energy transition, which involves long investments with limited profitability in an environment of higher interest rates.
 

About the AMF
The AMF is an independent public authority responsible for ensuring that savings invested in financial products are protected and that investors are provided with adequate information. The AMF also supervises the orderly operations of markets. Visit our website https://www.amf-france.org