New York, NY – Released today, the International Association of Credit Portfolio Managers’ fourth quarter Credit Outlook Survey has turned almost universally positive. Respondents forecast tighter credit spreads over the next three months for investment grade and high yield debt in both Europe and the United States. At the same time, and for the first time in two years, survey respondents also forecast fewer credit defaults over the next 12 months, with the single exception of the real estate sector which many view as still troubled.
The IACPM Major Markets Credit Spread Outlook Index was positive 24.6 for the fourth quarter, while the IACPM Aggregate Credit Default Outlook Index was positive 10.9.
“The global economy and credit markets have clearly turned a corner,” commented Som-lok Leung, Executive Director of the IACPM. “The recovery isn’t well-established and is still vulnerable to a setback but we are clearly past the panic of a year ago.”
While survey results were positive for the fourth quarter, a significant number of respondents continue to be concerned about both economic and market conditions. Roughly one-quarter of respondents think credit spreads will widen over the next three months, while 20 percent think corporate credits will experience rising defaults over the next 12 months.
Results for the retail/consumer section are also nuanced. The outlook for defaults swung from a negative -17.9 in the third quarter survey to positive 22.4 in the current one. At the same time, though, while respondents see improvement in the sector, that is being measured against very poor conditions over the previous couple of years. Unemployment also remains high but perhaps it will not get much worse.
“It’s important to note the forecast for defaults is over 12 months,” commented Mr. Leung. “If the outlook was for three or even six months, the results could easily have been negative. Economic conditions have improved but we are hardly experiencing a robust recovery.”
In terms of downside risks to the nascent recovery, survey respondents point to four possible developments which, although unlikely, would have devastating consequences. The first would be a potential sovereign default in Europe or perhaps elsewhere. The second potential risk is unintended, yet harmful, consequences in the drive to financial reform and the general overhaul of the financial system. Third, a clumsy or hasty pullback in fiscal or monetary policy, which have been responsible for jump starting the economy and the markets, could be very damaging. Finally, rising inflation could create the need for significantly higher interest rates which, in turn, could substantially impair growth.
Survey respondents are members of the International Association of Credit Portfolio Managers, or IACPM, which consists of credit portfolio managers at more than 80 leading banks and financial institutions in 11 countries in the U.S., Europe and Asia. They were surveyed at the end of the fourth 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 improvement in credit conditions, specifically fewer defaults and narrower spreads, while negative numbers indicate an expectation for deterioration with higher defaults and wider spreads.
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 more than 80 member institutions located in 11 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.