European securities markets remain at high risk despite a strong recovery in trading and investment conditions in the second half of 2013, according to a report from the European Securities and Market Authority (ESMA).
While overall market conditions have improved and trading volumes are increasing, which may reduce systemic risks, securities markets are still at significant risk from rapidly developing uncertainty in emerging markets affecting the EU.
Key developments seen in the second half of 2013 in Europe, include decreased volatility and improved securities market conditions. Similarly, equity fund flows are on the up after suffering declines early last year.
Equity prices increased by approximately 22% during the final six months of 2013, which is above their five-year average. Europe also registered better equity market performance than both the US and Japan at 15% and 13% respectively. Volatility fell from an average of 19.2% in H1 to 17.9% in H2.
Unfortunately, while European macro-economic conditions have improved, growing volatility in emerging markets has been rapidly impacting European trading activity and sentiment. Similarly, performance across EU members is mixed and many countries are still suffering from high unemployment, government and household debt.
However, fixed income funds saw net outflows during the period, largely due to a macro shift away from these instruments and into equities as central banks begin to withdraw their quantitative easing measures.
The European regulator noted that low interest rates since the financial crisis have encouraged investors to favour fixed income assets and said the end of low interest rates, which is expected to begin this year, can create issues revaluation, liquidity and counterparty risk as investors rebalance their portfolios.
ESMA also studied a number of other factors affecting European markets, including the impact of high-frequency trading (HFT). It found that, overall HFT made a positive impact on volumes traded, fragmentation, prices and tick sizes, though could also negatively affect volatility. ESMA sampled 100 top European stocks and found that HFT firms account for approximately 22% of value traded and 60% of orders placed.