Portfolio managers are nearly unanimous that a downturn in the current global credit cycle is a matter of when, not if.
But uncertainty about this timing prevents most of them from retreating to the sidelines, according to the latest quarterly market outlook survey of the International Association of Credit Portfolio Managers.
The survey indicates that managers may still be cautious, but do not have the levels of concern evident in the prior two surveys, when more believed the economy was headed for a tumble.
“People are not as negative as you might expect them to be this late in the cycle,” Som-lok Leung, executive director of the IACPM, said in a release. “It’s unusual but, as long as indicators, especially forward-looking ones, are benign, a number of market participants are unwilling to put on the brakes.”
Ninety-one percent of North American respondents believe that credit spreads will either widen or remain at current levels in the fourth quarter, and they are split pretty evenly (44% vs. 47%). In fact, while the IACPM’s three-month credit-spread outlook measuring managers’ confidence is still overwhelmingly negative, it is less so than the two prior quarterly surveys.
On a scale of +100 to (-)100, with negative numbers indicating managers expect deteriorating spread conditions, the index number was (-)36.1, indicating deteriorating credit spread conditions with both investment-grade and high-yield assets. That number was (-)69.2 three months ago in the June survey and an even more dire (-)76.5 after the first quarter of the year.
“No one thinks things are going to get much better; they’re either going to stay the same or get worse,” said Leung. “And even the people who think things are going to stay the same, I think most of them think it will eventually get worse. The question is timing.”
The survey was taken in the first week of October, as 10-year U.S. Treasury bond yields reached a seven-year high and stock markets were growing volatile. Expectations that the Federal Reserve will raise interest rate hikes through next year are also contributing to concern, but have yet to trigger any “widespread” pickup in credit impairments or workouts in portfolios, according to the IACPM.
The Trump administration’s tariff policies may be inflationary, but the IACPM said the survey respondents seemed unclear on how they would “separate winners from losers.” The same goes for Europe, where respondents “are not seeing” the outcome of Brexit or Italy’s challenges to European Union budget constraints creating any major problems for the overall European economy, the IACPM report stated.
Just over half (57%) of managers believe that corporate defaults will rise in the fourth quarter, and 34% expect no changes (only 8% see a decline in corporate defaults over the next year). The default index outlook for North American corporates is (-)43.2, which again is an improvement on the (-)65.5 result in the outlook heading into the third quarter.
That level was the lowest mark of the default index in five years.
European managers are more pessimistic about defaults, with 63% believing rates of corporate bankruptcies, distressed-debt exchanges and missed debt payments will rise over the next year. The IACPM default index worsened to (-)56.3 from (-)55.6 in the prior quarter.
The IACPM survey is a polling of more than 90 financial institutions in 20 countries, including portfolio managers at many large commercial banks, investment banks, insurance companies and asset managers.
