North American Default Outlook Edges Closer To Neutral
New York, NY – Respondents to the latest IACPM Credit Outlook Survey continue to forecast rising defaults and wider credit spreads but sentiment is somewhat improved over recent quarters. The outlook for corporate defaults over the next 12 months is negative -29.6 in the latest survey compared to minus -50.0 in the previous reading. The outlook for credit spreads over the next three months is negative -27.3 versus minus -47.0. Some survey respondents expressed surprise, however, that this quarter’s results were not more optimistic, given several recent signs economic conditions have improved. The Federal Reserve, for example, raised interest rates last month because it believes the US economy has sufficiently strengthened to allow an increase.
“Respondents are somewhat divided in this latest survey,” commented Som-lok Leung, the Executive Director of the International Association of Credit Portfolio Managers. “While overall sentiment is generally cautious, some survey respondents believe the credit outlook is more positive given the fact that interest rates are still low despite the Fed’s recent action, the economy is growing albeit slowly, the energy sector has improved and there are no obvious pressure points.”
The outlook for North American corporate defaults remains negative in the latest survey but the index result is much closer to a neutral reading than previous quarters. The 12 month outlook is minus -13.9 compared to negative -55.3 last quarter. While 36% of respondents expect defaults to rise over the next year, 42% think they will remain unchanged and 22% believe they will go down. Stated another way, almost two thirds of respondents think North American defaults will either stay the same or decline.
“Equity markets rose after Donald Trump’s victory in November and while financial stocks have clearly responded to his election, you could argue we would have had a rally even if Hillary Clinton had won,” said Mr. Leung. “Cash balances are historically high and people cannot stay uninvested forever.”
The outlook for defaults in other parts of the globe is distinctly more negative. Half of survey respondents believe defaults will rise in Europe as the European Union and the United Kingdom negotiate Brexit and nearly two thirds think defaults will rise in Asia, as China continues to grapple with its economy.
Survey respondents also think credit spreads will widen over the next three months. The spread outlook for North American investment grade debt is minus -25.7, while the outlook for European investment grade debt is negative -19.4.
“The outlook for spreads may be more of a short term phenomena,” commented Mr. Leung. “Spreads have tightened over the last quarter so some respondents say the next move for spreads could be to widen, at least over the near term.”
The Credit Outlook Survey is conducted among members of the IACPM, which is an association of credit portfolio managers at currently 99 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 end 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 currently 99 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.