Money managers were more optimistic at the end of the second quarter about the direction of credit spreads and credit default rates for the next three months, an outlook that applies to every region of the world and almost every sector, according to the latest quarterly outlook survey from the International Association of Credit Portfolio Managers, or IACPM.
The survey results signal a greater willingness on the part of portfolio managers to carry or add additional credit risk to their portfolios.
As default fears abate, the outlook for every large sector of the economy that consumes credit, including corporate, consumer mortgage and retail has improved. The credit outlook index registered an average
Among respondents in the survey, the expected direction of credit default rates was 6.0 on an index scale of -100 to 100, with 0 signifying no change.
Researchers credited the enormous government stimulus that has saturated markets and reduced fears of credit defaults globally.
True, more resent concerns have turned to inflation, and how quickly it could go on the upswing, but those involved with the study believe that any inflationary change could be short-loved and transitory, not structural.
It is natural to wonder how all of the stimulus-sponsored liquidity that flowed into the economy might be unwound.
“If the US economy is going gangbusters, it would be much easier to implement higher taxes, which the current administration is considering,” Som-lok Leung, executive director of the IACPM told ASR.
Respondents to the IACPM 12-Month Credit Default Outlook Index were generally expected to see an improvement in default rates, resulting in a weighted average reading of 2.6 for the IACPM Aggregate Credit Default Outlook Index.
Every credit product type and geography, except commercial real estate exceeded the weighted average index result. Specifically, the average outlook for corporate credit was 6.0. Cross referenced by corporate and geography, the North America respondents attained an index of 7.7; Europe reached 12.1; Asia reached 9.1; and Australia posted 15.
The weighted average for retail/consumer credit was 2.9.
Optimism for CRE improves, but still lags
Only the outlook for commercial real estate remained in negative territory, with a -1.5. Commercial real estate is expected to lag, because the sector is undergoing a structural transition.
“There are concerns about commercial real estate because of structural changes in retail, office space because people may or may not be working from and lodging because not as many people may be traveling,” Leung said.
The office sector has seen a dramatic shift as many workers stayed productive while working from home, facilitated by video conferencing applications like Microsoft Teams, Webex and Zoom. Also, while air travel is picking up, the question of the lodging sector’s long-term health is still an open question.
Still, that reported outlook was a vast improvement over the March 2021 reading, when responses put the index at 62.4. It was the biggest quarterly improvement since June 2020, according to the IACPM’s results.
