Rising Defaults Expected Globally

Latest IACPM Credit Outlook Survey Overwhelmingly Forecasts Rising Defaults on Corporate Debt in North America, Europe and Asia; Forecast for Consumer & Real Estate Debt Equally Challenging

     New York, NY – The latest IACPM Credit Outlook Survey overwhelming forecasts rising defaults globally over the next 12 months. Not a single survey respondent expects corporate debt defaults to fall in Europe, Asia or Australia. Just three percent think defaults will drop in North America. Overall, 73% of respondents forecast rising corporate defaults globally, while 26% expect them to remain at current levels. The overall IACPM Credit Default Index is minus -71.1 in the latest reading compared to negative -47.2 in October. It is the most negative result since the 2nd quarter of 2009, when the aggregate index was minus -72.3.

“The overwhelming majority of survey respondents clearly expect deteriorating conditions over the coming year,” said Som-lok Leung, the Executive Director of the International Association of Credit Portfolio Managers or IACPM. “We’re very late in a long economic growth cycle and we’re finally beginning to see the impact of US Federal Reserve rate hikes, along with a bite from trade tariffs. The continuing US government shutdown could have an effect as well.”

In the US, early indications of a slowdown are becoming more apparent. A number of companies have issued profit warnings and the Institute for Supply Management’s December report showed that while manufacturing continued to expand at the end of last year, there were declines in every sector. The ISM’s New Orders Index, for example, dropped 11 points to 51.1.

Survey respondents are also beginning to have concerns about China, particularly increasing stress on midsize companies. Trade tariffs appear to be an important factor in encouraging some of these companies to consider moving out of China to other countries in Asia.

The UK economy also appears to be beginning to soften, ahead of the Brexit deadline at the end of March. Survey respondents say, in addition to slowdowns in the retail and service industries, there is a general easing across the broader economy. Respondents caution the Brexit effect is less noticeable farther away from London but, even so, the yellow vest movement appears to be having a chilling effect on the French economy.

The latest IACPM survey reflects a broad global concern over consumers and the real estate sector. The retail and consumer mortgage index fell to minus -71.0 in the latest survey from negative -47.1 previously. The commercial real estate index dropped to minus -69.7 from negative -44.7.

“A lot of people have cautioned over the past couple of years that we were getting close to the end of the economic cycle,” noted Mr. Leung. “Now, it appears we’ll see it in the next 12 months.”

Interestingly, the outlook for credit spreads over the next three months is roughly the same as the previous quarter. The three-month Credit Spread Index is minus -38.4 versus negative -38.2. This may reflect increased volatility, however, as much as anything else. The survey was taken from December 27 through January 9 and spreads changed considerably. Respondents filling out their surveys at the beginning of the period faced a different set of circumstances as those responding at the end.

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 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 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.