With no end in sight to the ongoing war in Ukraine and the Federal Reserve resolved to continue to tame inflation by raising rates, professional portfolio managers overwhelmingly expect credit defaults to worsen globally by September.
None of the respondents among the International Association of Credit Portfolio Managers’ (IACPM) membership expect defaults to decline over 12 months, according to the professional association’s latest reading from June.
Outlooks for the next three months and 12 months were equally bleak for both the direction of credit spreads and credit default rates. With expectations in the red across the board, not a single region of the IACPM’s membership logged a positive outlook overall, according to June findings.
The expected direction of corporate default rates in North America is -88.9 on an index scale of -100 to 100, with 0 signifying no change. Europe registered the most negative forward-looking reading of all the regions in the study, with -91.2%.
“European members of the IACPM say the risk of recession is especially high in Europe, at least for the next several months, because of the ongoing conflict in Ukraine,” according to a statement from the IACPM.
North American respondents had their own worries to process, namely a potential end to historically low interest rates. While defaults are currently extremely low, that could change as the year progresses.
“Consumers and businesses have a bit of a cushion for now, but our members expect to see significantly higher numbers of defaults in 2023 and perhaps even into 2024,” according to Som-lok Leung, executive director of the IACPM.
On a more global scale, professional managers in the survey highlighted that central banks are using more aggressive monetary policy to fight rising inflation. They point to a delicate balancing act between monetary correction that can rein in inflation, without overcorrecting severely.
While portfolio managers are monitoring all elements of their portfolios, some areas are getting closer attention, which include leveraged loans, commercial office space, healthcare and particularly senior housing, a sub-sector that is still dealing with the after effects of the COVID-19 epidemic, according to the IACPM.
The IACPM Aggregate Credit Default Outlook Index registered a reading of 82.3% on the same scale.
Twenty-one percent of respondents expect an increase in credit default rates on corporate debt. Meanwhile, 18% of respondents expect credit default rates on retail/consumer mortgages to increase, while 19% of respondents expect credit default rates to increase on commercial real estate.
Expectations for 12-month credit default rates on corporate debt, on average, were 83.8%. Further, on average, 80.3% of respondents said they expect a deterioration of retail/consumer mortgage credit defaults and for commercial real estate the rate was 82.7%.
