European Outlook Optimistic But Considerably Lower Than US
New York, NY – Sentiment turned sharply higher in the latest quarterly Credit Outlook Survey from the International Association of Credit Portfolio Managers. Survey respondents forecast falling defaults over the next 12 months with a diffusion index score of 34.3 and tighter credit spreads over the next three months with a score of 41.7. Significantly, a clear majority of respondents expect fewer defaults among corporations with 61% of respondents expecting a lower number and just 8% of respondents expecting an increase.
The latest results in the IACPM’s fourth quarter Credit Outlook Survey build on results from the third quarter which called for tighter spreads with a diffusion score of 20.9 and fewer defaults with a score of 14.8
“Corporate balance sheets are exceptionally healthy,” commented Som-lok Leung, Executive Director of the IACPM. “Companies started hoarding cash during the financial crisis and have continued to pile it up as their profits have grown, making the outlook for defaults considerably more positive.”
Survey respondents have a decidedly different view of Europe, however, versus the U.S. Respondents expect tighter spreads in Europe with a diffusion result of 21.7 for investment grade debt but that is well short of the 56.0 given to U.S.investment grade credit. Growth in some parts of Europe is lagging the U.S. but the real concern is the sovereign debt crisis. As long as the possibility for further bailouts exists for countries like Portugal, or even potentially, a sovereign default, survey results will be tempered. Indeed, the outlook for spreads in European investment grade debt was almost unchanged from the third quarter, 22.4 versus 21.7.
“As long as people are worried about possibility of sovereign defaults, it’s hard to imagine unbridled optimism,” commented Mr. Leung.
Survey respondents are members of the IACPM, which consists of credit portfolio managers at 92 financial institutions in 17 countries in the U.S., Europe and Asia and include 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 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 improvement in credit conditions, specifically fewer defaults and narrower spreads, while negative numbers indicate an expectation for deterioration with higher defaults and wider spreads.
Interestingly, results in the fourth quarter survey are similar to the first quarter which was conducted at the end of March, 2010. Survey respondents then expected spreads to tighten with a diffusion score of 38.8 and a default outlook of 37.7. The outlook turned negative three months later, however, on fears of a double dip recession and the first wave of the European sovereign debt crisis. The crisis remains a factor but respondents are considerably less worried about a double dip. They are more likely to be concerned about rising inflation. Still, some respondents point to volatile spread indices and note nervousness is at higher level in general.
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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 92 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.