While markets and infrastructures functioned effectively through the health crisis, the imbalances that were already present at the outset have been accentuated and geopolitical tensions remain. Aside from the many challenges of financing the post-Covid 19 economic recovery, which constitutes an economic vulnerability in its own right, the Outlook highlights growing risks for financial stability, with the possibility of a new market correction and the weakened solvency of numerous companies.
Despite extreme tensions in March and thanks to the intervention of public authorities, the efficient functioning of European markets has demonstrated the resilience of the financial sector: in a context of heightened volatility and significant transaction volumes, market infrastructures and post-trade services have fully played their role. This unprecedented situation has also demonstrated the resilience of asset management: French money market funds have for example been able to cope with record redemptions as well as the freezing of some underlying markets with the corresponding valuation difficulties for certain asset classes.
The health crisis has strongly weakened economic prospects, which explains the sudden stock market correction in March. National and European authorities have implemented ambitious measures to preserve liquidity and limit the impact of the crisis. However, the AMF identifies growing risks for financial stability. In a context of uncertainty as to the outcome of the health situation and the real impact of the crisis on economic actors, the stabilisation of markets remains fragile and their rebound appears to be disconnected from the economic outlook. It is still too early to fully assess certain effects of the crisis, but market valuations do seem high in relation to profit forecasts.
Debt ratios in the non-financial sector are also a concern: they continue to grow as a result of the fall in revenues and support measures based primarily on loans. At worldwide level, insolvency risk represents a more general vulnerability, with the threat of waves of ratings downgrades and fears of large moves on bond markets. Public debt is also an issue, with Italy being an emblematic risk for the Eurozone.
The risk to the financing of the economy is therefore back in 2020 and is likely to be reinforced in 2021. The already considerable reliance on debt, whether bank or market debt, represents a major vulnerability in the medium term, which requires a transition to a financing model based more on equity capital. This recapitalisation of the economy should also take climate change transition into account, which constitutes an additional challenge.
Concerning retail investors, the unprecedented lockdown situation has triggered revived interest in the stock markets. However, households’ risk-free investments are posting new records: they could reach €100 billion in 2020 following the additional savings induced by the management of the health crisis. The financing via equity capital that is necessary to stimulate recovery requires a gradual reorientation of these savings, which also implies a new challenge: that of the information provided to investors by issuers, at a time when asset valuation is complicated by the lack of visibility on the future.
The Covid-19 crisis must not overshadow the vulnerabilities that existed beforehand which are still present such as cyber-security or Brexit.
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
