Respondents See Signs Of Stability If Not Optimism
New York, NY – The latest IACPM Credit Outlook Survey has turned positive for the third quarter, as respondents forecast fewer defaults over the next 12 months and tighter credit spreads over the next three months. The IACPM Credit Default Outlook Index is positive 14.8, while the IACPM Credit Spread Outlook Index is positive 20.9. Both results are in contrast to last quarter, when survey respondents forecast somewhat higher defaults and wider credit spreads.
IACPM Executive Director Som-lok Leung cautions, however, that respondents may not be predicting significantly better conditions so much as not expecting trends to get worse. “Stability appears to be the key for a number of the survey takers,” commented Mr. Leung. “They’re not expecting a lot of improvement but they believe conditions have at least stabilized, if at more subdued levels.”
Survey respondents are members of the International Association of Credit Portfolio Managers, or IACPM, which consists of credit portfolio managers at 94 financial institutions in 17 countries in the U.S., Europe and Asia and include many of the world’s largest commercial wholesale banks, investment banks and insurance companies, as well as a number of asset managers. Members are surveyed at the end of every quarter. The results are calculated as diffusion indexes, which show positive and negative values ranging from 100 to -100, as well as no change which is in the middle of the scale and is recorded as “zero.” Positive numbers signify an expectation for im-provement in credit conditions, specifically fewer defaults and narrower spreads, while negative numbers indicate an expectation for deterioration with higher defaults and wider spreads.
The latest forecast results are clearly positive but perhaps hint at an element of uncertainly, as survey respondents are generally split between those who believe conditions will improve in coming months and those who see no change. For example, 44 percent of respondents forecast a decline in corporate defaults, while 39 percent expect them to remain at current levels. Just 17 percent, however, think corporate defaults will increase. Similarly, 41 percent of respondents predict consumer defaults will drop, 35 percent expect no change and 24 percent think they will increase.
“There are a number of positive and negative cross currents at play,” commented Mr. Leung. “For example, while the US and Japanese central banks are considering quantitative easing and the US equities market enjoyed a record month in September, there is at the same time continuing concern about stubbornly high unemployment and worries about further credit problems in Europe. One of our London-based members noted the fog may be lifting but cautions that people should continue to carry an umbrella.”
At the same time, however, some survey respondents note there is beginning to be greater clarity over the direction of financial reform. The Bank for International Settlements released its Basel III proposals last month and, while they called for higher capital requirements for large banks, they were less stringent than expected and also allowed for a much longer implementation period. Many questions remain unresolved but the overall shape of the regulatory environment appears to be getting clearer.
“Financial markets thrive on certainty and while market participants may or may not agree with all the new regulations, there is a growing sense of clarity which provides a firmer foundation for the future,” commented Mr. Leung.
Please click here to access a selection of aggregated 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 94 member institutions located in 17 countries, is a professional association dedicated to the advancement of credit portfolio management. Founded in 2001, the organization’s programs of meetings, studies, research and collaboration are designed to increase awareness of the value and function of credit portfolio management among financial markets worldwide, and to discuss and resolve issues of common interest to its members.