11 June 2025
It’s easy to think markets move on data: earnings, GDP, inflation prints, etc. However, if you scratch the surface you’ll find something far more intangible steering capital flows - confidence. This is the oxygen of investing, and when present, it fuels risk appetite, innovation, and long-term growth. However, when absent, even the soundest assets fall victim to panic, mispricing, and systemic stress.
History offers no shortage of proof: from the 2008 financial crisis to the 2023 collapse of Silicon Valley Bank, where a digital-era bank run erased $42 billion in deposits within 24 hours. In this scenario, confidence has acted as both an accelerant and an extinguisher. In today's hyper-connected markets - where news spreads faster than fundamentals evolve - the fragility of belief is as much a risk factor as interest rates or inflation.
Markets don’t crash and burn simply because valuations are high or earnings miss. They fall because investors lose belief in the system, its rules, its actors, or its capacity to self-correct. Here's how that erosion manifests:
As confidence declines, so does willingness to transact. Bid-ask spreads widen, “safe” assets get hoarded, and funding markets dry up. The UK’s gilt crisis in 2022 is a case study - long-dated bonds saw sharp volatility not due wholly to worsening fundamentals but because buyers vanished.
Institutional investors shift capital en masse into perceived safe havens - typically cash, US Treasuries, or gold. This rotation is often indiscriminate, punishing quality assets alongside speculative ones. When belief disappears, valuation logic frequently goes with it.
A loss of confidence in one asset class, institution, or region can spark broader distrust. Think back to Lehman Brothers, where the collapse was manageable on paper, but the crisis came from a total freeze in interbank trust. Counterparties didn’t know who was next, so they assumed everyone was vulnerable.
This is where regulation and investor protections step in - not to suffocate innovation or returns, but to rebuild trust when it's in short supply. When done right, regulation doesn't crowd out risk; it makes risk investable.
Markets function best when participants know the rules and trust they’ll be enforced. That’s why the post-GFC regulatory frameworks (Basel III, Dodd-Frank) focused on transparency, capital buffers, and stress testing. Today, those mechanisms offer forward-looking guardrails that stabilise sentiment before panic sets in.
Confidence also grows from alignment. For example, the past decade has seen a rise in Environmental, Social, and Governance (ESG) mandates. Not just to address climate risk but also to ensure businesses and asset managers are accountable to a broader spectrum of stakeholders. This isn't idealism; it's realism, and long-term capital will flow to firms that operate predictably, responsibly, and transparently.
Nowhere is the confidence-regulation nexus more tested than in crypto. The absence of uniform frameworks has enabled innovation but also spectacular collapses (FTX, Terra). Regulators from Hong Kong to Brussels are racing to build compliant onramps. As we’ve seen in Hong Kong’s digital asset licensing regime, clarity leads to capital confidence because the market doesn’t need leniency; it needs rules it can trust.
Markets can price risk but struggle with uncertainty, especially legal or structural ambiguity. Therefore investor protections such as; deposit guarantees, fair disclosure laws, and redemption gates in illiquid funds (e.g. LTAFs in the UK), act as psychological safety nets. When clearly understood and effectively communicated, they limit irrational outflows and allow time for fundamentals to reassert themselves.
Let’s not forget that market confidence is also deeply psychological. Decision fatigue, fear of missing out, and herd mentality all distort rational judgment. In volatile environments, investors crave narrative as much as data.
This is where advisors, institutions, and financial media play a role. By reinforcing long-term strategies and filtering noise, they can help prevent temporary dislocations from becoming structural ruptures.
Confidence isn’t binary, it fluctuates, however, it matters more than most risk models acknowledge. It's the force that keeps capital moving, markets functioning, and innovation funded, and when it falters, even the best ideas struggle to find air.
The good news is that confidence can be built/rebuilt (carefully and often slowly) with robust regulation, transparent governance, and strategic investor protections. In this scenario, markets can recover - and often do - stronger and smarter than before, but don't take a second chance as a given.
In the end, it’s not just returns that drive investment. It’s the belief that those returns are real, fair, and achievable. That’s the true benchmark, and the markets that nurture it will lead and thrive Back to News
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