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The Autorité des Marchés Financiers publishes its 2021 Markets and Risk Outlook

The Outlook highlights the return to normal of market indicators despite continuing health, but also economic and financial vulnerabilities: the uneven nature of the recover, increase in public and private debt, the threat of rising interest rates and inflation, the proliferation of serious operational incidents in market infrastructures, or the risk of transition to new benchmarks. Post-Brexit financial market developments also highlight the risks to the Union's sovereignty and competitiveness.

The impact of the pandemic seems to be a thing of the past on the markets according to valuation and liquidity indicators, as well as investment flows in financial markets whether these are invested directed or via collective management. At a time when vaccination campaigns are proceeding at different speeds and variants are appearing, there is still a great deal of uncertainty as to the outcome of the health crisis, and the clear improvement in the economic outlook does not apply to all sectors and countries. For instance, the discontinuation of aid schemes for companies could mean solvency problems for those made vulnerable by the crisis. In addition, the risk related to the sustainability of public debt remains a concern in the medium term, in light of the rise in that debt driven by the response to the health crisis and the recession, and given the risk of a rise in interest rates fuelled by a return to growth and inflation which is becoming signficant.

The document also highlights the complexity of reconciling the sovereignty and competitiveness of the European Union in the wake of Brexit. UK-based clearing houses remain essential for certain activities, such as euro-denominated derivatives, while Brexit has also resulted in a shift of some derivatives activity from the UK to the US. In addition to these unfavourable developments, there is the risk of regulatory divergence with the United Kingdom, such as the Financial Conduct Authority's decision to no longer apply the MiFIR double volume cap mechanism aimed at limiting the level of “dark pool” trading to EU equities on UK trading venues.

The transition to new risk-free benchmark rates, with the IBOR transition at the end of 2021, remains an element of short-term risk. With the support of the authorities, the financial industry is devoting significant resources to systematising the identification of IBOR exposures, implementing transition processes and developing the appropriate systems. However, some types of contracts, such as syndicated loans, cannot be automated and some non-financial companies appear to have adopted a wait-and-see attitude, although they are also concerned.

The year 2021 has also been synonymous with multiple market incidents: the case of Archegos, for example, which found itself unable to meet its margin calls, highlighted the unsuspected scale of certain risks and the robustness of a banking system capable of absorbing very heaving losses without triggering a systemic crisis. The succession of serious operational incidents over the past year, without any malicious action, is also a reminder of the vulnerabilities of market infrastructures around the world.

In asset management, the Outlook describes a return to structural trends with the rise of passive management in a low interest rate environment which is putting increasing pressure on costs and fees, and the development of private equity which continues at a sustained pace. The risks associated with these developments, which were already identified before the pandemic, have been accentuated, as have the ever-increasing leverage and valuations for private equity. Nevertheless, private equity is called upon to play a role in supporting the equity financing of SMEs at a time when the health crisis has accelerated profound changes in productive sectors, such as the digital and climate transition. 

Channelling savings into the equity capital needed by businesses remains the long-term challenge to ensure the successful exit from the pandemic crisis and the ecological transition. The Outlook raises questions about the diversification of retail investments and the meaning of the return of the French to the equity markets at a time when they were at their lowest point during the first semester of 2020. Although this is a welcome counter-cyclical phenomenon, confirmation is required that it is an informed long-term investment.

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