Latest IACPM Credit Outlook Survey Forecasts Wider Spreads and Rising Defaults Globally But Differences Are Seen Regionally; Higher Expectation for Defaults in North America
New York, NY – Respondents to the latest IACPM Credit Outlook Survey forecast wider credit spreads and rising credit defaults across the globe. The IACPM Three Month Credit Spread Outlook Index is minus -66.0 in the latest reading, while the Aggregate 12 month Credit Default Outlook Index is negative -51.1. The results are the most negative since the Credit Spread Index was minus -69.1 in the second quarter of 2008 and the Credit Default Index was negative -52.8 in the second quarter of 2016.
At the same time, while there is concern regarding credit conditions globally, there are different circumstances behind the worries regionally. North America is further along in the economic cycle than Europe, so respondents forecasting conditions in the region are focused on the Federal Reserve and rising interest rates which are coming in response to a stronger economy and concerns for higher inflation.
“In the US and the rest of North America, it’s a classic inflationary environment,” commented Som-lok Leung, Executive Director of the International Association of Credit Portfolio Managers. “As interest rates rise, one would expect to see wider spreads and higher defaults and, in fact, this is a trend we’ve seen for the past few months.”
In Europe, on the other hand, while the European Central Bank has announced an end to Quantitative Easing in December, it also says it will keep its key lending rate at 0.0% until next summer. Reflective of this, a somewhat smaller number of survey respondents expect credit defaults to rise in Europe compared to North America. Sixty six percent of respondents think defaults will increase in North America versus 56% who believe defaults will rise in Europe.
“Europe is still in an easing mode, so the credit outlook is more moderate, at least in the short term,” commented Mr. Leung. “Spreads may widen, because they have nowhere else to go, but there’s no rush to see significantly higher default rates.”
Survey respondents are even more divided over the direction of defaults in Asia and Australia. Fifty two percent of respondents believe defaults will rise in Asia but 48% say they will remain at current levels. In Australia, while 43% of respondents believe defaults will increase, a majority, 57%, think they will remain the same.
Hanging over most of the world, though, is the threat of a global trade war. Trade wars are inflationary, which could certainly result in increased defaults. At this point, however, while there is some early evidence of a reaction to the threat, such as reduced barge traffic in the US, survey respondents say it is far too early to predict the ultimate impact. Brexit is another concern but, again, the picture is unclear. Recent events have increased uncertainty, especially for the financial services sector, but it is premature at this point to forecast the final disposition of the process.
The survey is conducted among members of the IACPM, an association of over 100 financial institutions in 21 countries around the world. Members include portfolio managers at many of the world’s largest commercial banks, investment banks and insurance companies, as well as a number of asset managers. Members are surveyed at the beginning of each quarter.
Survey results are calculated as diffusion indexes, which show positive and negative values ranging from 100 to minus -100, as well as no change which is in the middle of the scale and is recorded as “0.0.” Positive numbers signify an expectation for improved credit conditions, specifically fewer defaults and narrower spreads, while negative numbers indicate an expectation of deterioration with higher defaults and wider spreads.
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The full aggregated survey results will be published with a 6 months time lag in the members only section of our website. Please click here> to access prior quarters’ survey results.
The IACPM, with over 100 member institutions located in 21 countries, is a professional association dedicated to the advancement of credit portfolio management. The organization’s programs of meetings, studies, research and collaboration are designed to increase awareness of the value and the function of credit portfolio management among financial markets worldwide, and to discuss and resolve issues of common interest to its members.