Credit Conditions May Not Worsen in Near Future

Amid Concerns Over Trade, Iran, Oil Prices, Politics and Brexit, IACPM Credit Outlook Survey Respondents Are Split; Credit Conditions Could Worsen But May Not in Near Future

New York, NY – Just a handful of respondents to the latest IACPM Credit Outlook Survey expect credit conditions to improve in 2020 but, beyond that, respondents are almost evenly split between those who think conditions will get worse or remain at today’s benign levels. Forty eight percent of respondents think corporate defaults will rise globally over the next 12 months, while almost the same number, 47%, think they will stay at the same level. Just four percent expect defaults to fall.

“We’re clearly late in the economic cycle but conditions haven’t gotten any worse, largely because central banks have added liquidity to keep economies going,” commented Som-lok Leung, Executive Director of the International Association of Credit Portfolio Managers. “The cycle will turn at some point but when? In six months? Who knows?”

There is certainly no shortage of challenges facing global financial markets. Trade war, Iran, energy prices, politics and Brexit to name just a few. But, for the moment, many appear to be on the back burner. Fear over a trade war has gone down and both Iran and the US seem to be interested in avoiding a further escalation of tensions.

“Things seem calmer at the moment and the Administration, which has been the key driver on trade, would seem to have bigger fish to fry,” said Mr. Leung. “That could change quickly, of course, and while we can’t say the issues concerning trade are completely resolved, we seem to have gone from a rapid boil to a white simmer.”

Financial markets focused on energy prices, among other things, during the confrontation with Iran but for the United States, at least, energy prices are not as much of a problem as they were in the past. The US has become the world’s largest energy producer and higher oil prices are a net positive. Five years ago, oil price hikes were bad news for the US economy but not anymore and markets are calmer.  “Shale oil production can also be revived quickly,” noted Mr. Leung. “If the price of oil hits $100 a barrel, capacity will quickly increase in the US and help mitigate any disruption.”

Brexit is one challenge that may not go away this year. Boris Johnson’s UK government has the votes to leave the European Union at the end of January but will still need to hammer out a new trade agreement with the EU by the end of the year. Trade agreements often take five to ten years to complete but the UK and the EU will only have eleven months. A transition period covering 2020 will expire at the end of December and, if no trade agreement is in place, the effect could be the same as a no-deal Brexit.

The Credit Outlook Survey is conducted among members of the IACPM, an association of more than 100 financial institutions in over 20 countries around the world. 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.

Please click here> to access a selection of aggregate 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 over 100 member institutions located in 20 countries, is a professional association dedicated to the advancement of credit portfolio management. The organization’s programs of meetings, studies, research and collaboration are designed to increase awareness of the value and the function of credit portfolio management among financial markets worldwide, and to discuss and resolve issues of common interest to its members.