Even before J.P. Morgan chairman and CEO Jamie Dimon warned of the unprecedented dangers to the world economy from geopolitical conflicts and
Responding to the Association of Credit Portfolio Managers' Q3 Credit Outlook Survey, IACPM members set the association's global Credit Default Outlook Index at minus -59.9, indicating strong expectations of corporate defaults. The results of the survey, which was published in October 2013 and conducted before an unexpectedly strong U.S. employment report was released and war broke out in Israel, were calculated as diffusion indices.
Some 74% of survey respondents expect North American corporate debt to experience increased default rates. Meanwhile, 69% see an increase for European corporate debt, and 50% see an increase for Asian corporate debt.
IACPM members have maintained their negative outlook for credit default rates over the past 12 months, and now very few are predicting an improvement, Som-lok Leung, IACPM's executive director, told Asset Securitization Report.
Respondents also indicated a strong expectation of widening credit spreads, producing an index value of minus -56.7 for the IACPM Three Months Major Markets Credit Spread Outlook Index. "The outlook for spreads has also been negative over the past 12 months," Leung said, "and very few say spreads are going to narrow."
Not surprisingly, the greatest expectation of credit spread increases was for high-yield debt, with 72% of respondents expecting a higher spread for the CDX North America High Yield 5-year index, and 70% expecting a wider spread for the iTraxx Europe Crossover 5-year index.
Wider spread expectations are not just for future quarters. IACPM members noted that market moves have already pushed spreads wider, thus covering much of their forecast, the IACPM said in a news release. Respondents also said that although they are currently seeing limited evidence of trouble in their portfolios, most expect to see rising credit defaults globally over the next 12 months.
This echoes Dimon's view.
"Currently, U.S. consumers and businesses generally remain healthy, although consumers are spending down their excess cash buffers," he said in a Q3 2023 earnings statement. "However, persistently tight labor markets as well as extremely high government debt levels with the largest peacetime fiscal deficits ever are increasing the risks that inflation remains elevated and that interest rates rise further from here."
IACPM members are taking seriously U.S. Federal Reserve chairman Jerome Powell's goal of reducing inflation to two percent. "Several survey participants note financial markets have seemingly been in denial regarding the Fed's intentions and have only recently woken up to the notion chairman Powell is serious about holding the line at two percent," the IACPM said in a news release.
"Right now, the Fed is still fighting inflation and Jerome Powell has been clear that the target is 2%," Leung told ASR. "We're still above that, so rates will remain high and will get higher. The September U.S. inflation rate was 3.7%, so the Fed won't lower rates. The Fed and other central banks have made it very clear that they will keep rates high. In that environment, things are unlikely to improve, especially with all the other pressures in the world, particularly geopolitical issues."
IACPM members have a high expectation of recession, with 64% seeing a recession in the U.S. by the end of 2024 and 92% in Europe by the end of 2024. They pushed back their timeline since the IACPM's Q2 2023 survey, when 56% of respondents for the U.S. and 65% for Europe expected a recession in 2023.
"Although the expectation of recession has been pushed back a bit, most members think it will come sometime in 2024," said Leung. "Also, a large minority of respondents believe that Europe may already be in recession. It's very difficult to have a booming economy when rates are high and possibly getting higher. So, this is why the consensus view is that recession will be coming at some point."
