Forecast For North America Improving – Europe Remains Negative
New York, NY – The outlook for credit spreads and defaults is the widest ever seen between North America and Europe in the latest quarterly Credit Outlook Survey conducted at the beginning of this month by the International Association of Credit Portfolio Managers. The credit spread outlook improved for North America, moving from a flat reading of 0.0 for investment grade debt in the previous survey to a solidly positive 19.1 and increased from a negative -15.0 for high yield securities in the last survey to a positive 7.3.
At the same time, the outlook for spreads among European credits turned even more negative with investment grade debt declining from negative -15.4 to negative -21.1 and the forecast for high yield credits dropping from negative -20.0 to negative -29.0.
“In the last survey, people were pretty much bearish across the board,” said Som-lok Leung, Executive Director of the IACPM. “Now, there’s continued bearish-ness about Europe but, in North America, there are at least glimmers of hope that the US is turning the corner. Corporate balance sheets are strong, earnings are expected to be strong and there has been some favorable news on employment, housing and manufacturing.”
The survey is conducted among members of the IACPM, which is an associa-tion of credit portfolio managers at 90 financial institutions located in 17 countries in the U.S., Europe, Asia, Africa and Australia. 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.
Not surprisingly, in the latest survey, respondents continue to forecast a rising number of defaults in Europe over the next 12 months. Higher European corporate defaults are seen with a negative index score of -45.0. European retail and consumer mortgages received a negative score of -64.7, while European commercial real estate registered a negative -60.6.
In contrast, survey respondents are modestly positive on North American corporate credit, as well as retail and consumer mortgage debt with readings of 4.5 and 5.0 respectively. North American commercial real estate received a slightly negative score of -4.9.
“Strikingly, in comparison to 2008 when Lehman Brothers filed for bankruptcy protection, there doesn’t seem to be the same perceived high level of correlation between problems around the world,” said Mr. Leung. “Several managers say they have looked for interconnectedness among their clients and are not finding any. Instead, they say US corporate performance is fundamentally different and that is creating an underlying tone of recovery. Further, US consumers are proving more resilient so the fundamentals are building a good case for some level of decoupling from Europe.”
The bifurcating views regarding North America and Europe are undoubtedly having an impact on how credit portfolio managers are managing their holdings. One survey respondent said his institution was taking a negative to neutral view on the US at the end of last year and was shorting its positions. Now, the institution is neutral to positive on the US and shorting seems inappropriate. The manager continues to be concerned about Europe, however.
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 90 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.