Respondents to Latest Credit Outlook Survey Continue to Forecast Higher Defaults and Wider Spreads but Say ‘Worst Case’ May Not Happen
New York, NY – A large majority of credit portfolio managers responding to the latest IACPM Credit Outlook Survey believe credit defaults will rise in coming months, while a somewhat smaller majority think credit spreads will widen. Seventy three percent of respondents forecast higher corporate defaults globally, with 26% predicting defaults will remain unchanged. At the same time, 55% say credit spreads will widen on North American investment grade debt, while 60% believe spreads will widen on European investment grade debt. Seventy percent say spreads will also widen on North American high yield debt and 77% believe spreads will widen on high yield debt in Europe.
Perhaps surprisingly, a number of respondents say, while the forecast remains negative, credit conditions seems to be stabilizing and the outlook is at least clearer.
“The third quarter was, in some ways, a carryover from the last couple of months of the second quarter,” commented Som-lok Leung, Executive Director of the International Association of Credit Portfolio Managers. “Nobody knew what was going to happen in April but by May and June conditions were stabilizing and that has continued into the third quarter.”
To be sure, survey respondents say there are haves and have nots. Some sectors are doing well in spite of the economic downturn, while others are struggling. Technology companies, health care and consumer staples are seen as the most resilient during the Covid-19 crisis, while airlines, hotels and the oil and gas industry are most in need of risk mitigation.
“We’ll continue to see defaults but where do we top out? That’s the big unknown,” said Mr. Leung. “A number of companies are facing liquidity crunches and some of them won’t survive.”
The outlook for credit spreads is a different story. Survey respondents say spreads are being driven by central bank liquidity measures which are going to be in place for the foreseeable future.
“Call it the Fed put,” noted Mr. Leung, “but it’s hard to see a big selloff as long there is this level of central bank involvement.”
Unquestionably, fiscal stimulus has played a key role in settling markets and the economy and survey respondents say more is needed. At the same time, though, respondents believe neither the economy nor credit conditions will return to normal until an effective vaccine is widely available. One respondent noted schools, restaurants and other institutions have tried reopening, only to close or cut service following a spike in new Covid-19 cases. Even with a vaccine, respondents are nervous the rollout and economic recovery will be choppy.
“There is considerable concern there will not be a clear signal that an effective vaccine is widely available and that we can simply go back to a normal life,” said Mr. Leung. “The reality will almost certainly be messier with different vaccines, different regimes and spotty distribution. It could be a long time before we have real clarity.”
The Credit Outlook Survey is conducted among members of the IACPM, an association of 115 financial institutions in 25 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.
Please click here> to access a selection of aggregate survey data.
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 115 member institutions located in 25 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.