The latest credit outlook survey from the International Association of Credit Portfolio Managers (IACPM) found that 42% of managers surveyed forecast rising defaults over coming months, with 20% saying defaults will decline. Taken together, the responses result in a -21.6 score in the latest reading of the IACPM Aggregate Credit Default Index. Even though the index is still negative, it’s an improvement from the -36.6 reading at the beginning of July.
“Last month’s Fed Funds rate cut will certainly help borrowers but it doesn’t solve every problem, especially among highly leveraged borrowers,” commented Som-lok Leung, executive director of the IACPM. “Nor does it address significant global concerns, including continuing geopolitical difficulties and substantial electoral uncertainty.”
Survey respondents, who manage the corporate loan portfolios at global banks, insurance companies and asset managers, say the Fed appears to have achieved a so-called soft landing, bringing inflation down without triggering a recession. US unemployment inched up this past summer before dropping in the latest reading. Respondents also note European banks are generating more capital than expected, even while observers remain concerned about the German and French economies, as well as upcoming budget deliberations in the UK. Indeed, 53% of respondents expect credit defaults to rise in Europe, more than any other region globally.
“A soft landing wasn’t expected by many people but it looks like it’s here,” said Leung. “Our members are taking that into account as they weigh what risks are still in play and what effect they will have on defaults and credit spreads. The picture may not be totally rosy, but it is better than it was.”
While survey respondents remain vigilant about risks and challenges in the current financial and market environments, they largely believe that global economies will not go into recession. Of the respondents surveyed, 91% say the US will avoid a recession, while 84% believe the Asia-Pacific region will avoid one, 80% say the UK will do the same, and 70% say Europe will skip recession as well.
The latest survey also forecasts wider credit spreads in both North America and Europe, especially among high-yield assets. IACPM members point out credit spreads covering financial activity such as leveraged buyouts are vulnerable to changing perspectives and, considering ongoing developments, spreads could be susceptible to widening.
For reference, survey results are also 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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