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IACPM Quarterly Credit Outlook Survey Turns Negative

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  • IACPM Quarterly Credit Outlook Survey Turns Negative
10/20/2011

New York, NY – The IACPM Credit Outlook Survey forecasts higher defaults and widening credit spreads in the latest quarterly reading, as survey respondents focus on the European sovereign credit crisis and anemic U.S. economic growth. For the first time in over a year, respondents forecast rising defaults with a diffusion index reading of negative -39.0 and wider credit spreads with a score of minus -12.8.

While the forecast is the most negative since the survey taken in June 2010, underlying opinion is somewhat more evenly distributed. To be sure, few respondents are calling for improved conditions. In terms of corporate defaults, for example, while 47% believe they will rise over the next 12 months, 41% think they will remain at current levels. Twelve percent of respondents forecast declining corporate defaults.

Survey respondents are also somewhat more evenly distributed in their forecast for credit spreads. Overall, respondents believe they will widen, yet fully one-third think spreads will actually tighten, even in high yield markets in both the U.S. and Europe.

"The markets are volatile and our survey respondents are clearly focused on downside risks," commented Som-lok Leung, Executive Director of the IACPM. "As portfolio managers, they're concerned they may be missing something and are making sure the scenarios they are considering cover the downside."

Survey respondents are members of the International Association of Credit
Portfolio Managers, or the IACPM, which is an association of credit portfolio managers at 92 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.

Results in the current survey reflect deeper concern over Europe than the U.S. Survey respondents forecast higher European corporate defaults with a score of minus -58.5 compared to minus -34.9 for the U.S. Respondents view Europe as an immediate threat, while the U.S. is viewed as vulnerable to spillover effects such as reduced exports to Europe.

"The potential consequences in Europe are devastating but so far we don't know what's going to happen," said Mr. Leung. "Either the crisis will be resolved or it won't. Until the picture is clearer, there will be a pall over the markets, especially in Europe."

On the bright side, however, respondents note that corporations are continuing to hold record amounts of cash which makes them less likely to default. Stubbornly high unemployment, on the other hand, makes consumers more vulnerable, along with prospects for real estate, both consumer and commercial.

"In some ways, the outlook for corporations is simply catching up to previous concerns over the retail and commercial mortgage markets," noted Mr. Leung. "The markets and our respondents are concerned about the future and, as such, no sector is spared."

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 "zero." Positive numbers signify an expectation for improved credit conditions, specifically fewer defaults and narrower spreads, while negative numbers indicate an expectation for 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.


About IACPM 

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.