In a context of markets’ exuberance, led by unparalleled monetary and fiscal support and supported by massive commitment of private investors - which together exacerbate risks of hyper-concentration across equity investments, we wish to draw attention to two points which we believe are critical for understanding the fragile balance of the current system.

  1. The uninterrupted rise of passive investments
    Today, passive investments accounts for more than 30% (estimated) of global assets under management. In the United States, the Federal Reserve of Boston has calculated a market share of passive investments of above 40% for the American market alone, versus 14% only in 2005; and of around 48% just for equity markets.1 This uninterrupted rise represents a radical change in the way the balance between supply and demand is
    achieved today.
  2. The multiplier effect of leverage and liquidity risk
    An important consequence of both low interest rate environments and massive monetary support over the past decade can be witnessed today in the level of leverage sought by investors. Leverage is indirectly acquired via an increasingly frequent use of options and directly with the use of margin trading accounts. Applied to the US GDP, the recent surge in this leverage maximization in the United States has reached record levels in absolute terms; also with regards the acceleration of this phenomenon.
     
1 Sources : The Shift from Active to Passive Investing : Risks to Financial Stability? (2020), Anadu et al. Federal Reserve Bank of Boston, Morningstar

Written in March 2021

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