The outlook for global credit conditions has been improving, but remains negative, according to the International Association of Credit Portfolio Managers' (IACPM) latest Credit Outlook Survey of its members.
The IACPM's 12-month average global corporate credit default outlook index was negative -27.5, which indicates more participants expect defaults to rise rather than fall. At least this was an improvement on the negative –56 reached last December and -80.7 in March 2023.
The IACPM's Q1 2024 survey, which is calculated as a series of diffusion indices, reflecting the number of respondents with negative or positive outlooks, revealed varying outlooks for different regions and sectors. The region with the lowest corporate credit default outlook index was Australia at negative -9.5, followed by Asia at negative -21.4 and North American at negative -29.8. The region with the worst corporate credit default outlook was Europe (negative -40.9).
The sector with the poorest credit default performance expectation was commercial real estate (negative -50).
Nineteen percent of survey respondents thought Europe was already in a recession, while 37% expected the region to enter a recession later this year. Thirty three percent of respondents thought the U.K. was already in a recession and another 33% forecast it would go into a recession later this year.
Fifty seven percent of survey participants thought corporate defaults would rise in Europe, while 27% expected them to stay the same and 16% forecast a decrease.
By comparison, 87% of respondents said Asia would not go into a recession, and 75% thought North America would avoid one.
Overall, for North America, 51% of survey respondents expect higher credit defaults, while 28% think they will remain at current levels, and 21% believe they will come down.
The brighter North American outlook was reflected in spread expectations, with North American Investment Grade debt expected to have the best performance in the IACPM's three-month Credit Spread Outlook Index. The expectation of tightening spread in this class set its credit spread outlook at a moderately positive value of 11.4, compared to negative -15.9 for North American High Yield 5Y, negative -15.4 for iTraxx Europe 5Y, and negative -25.6 for iTraxx Europe Crossover 5Y. The overall outlook for credit spreads was negative -10.8.
"The North American Investment Grade credit spread index is slightly positive, which indicates that slightly more think it is going to narrow rather than widen," IACPM executive director Som-lok Leung told Asset Securitization Report. "But it is still a minority of respondents (39%) who think it is going to narrow." For North American High Yield debt, 43% of respondents expected a widening spread.
For commercial real estate, 60% of respondents expected a rise in credit defaults for average global commercial real estate, 30% expected it to remain unchanged, and 10% expected a reduction. For average retail/consumer mortgages, the figures were slightly better at 47%, 40% and 14% respectively.
"There are geographic differences concerning commercial real estate, but the sector has been a big source of concern since COVID," Leung said. "Lots of US regional banks have significant exposure to commercial real estate, and regulators are watching that very closely."
The negative index values are more a reflection of unrealized defaults rather than actual defaults, according to Leung.
"One of our members commented that we have had a period of higher unrealized defaults," he said. "I think there is still expectation of some defaults coming up as they haven't all come to roost yet, which is why the overall indexes are still negative."
While there have been some large business credit defaults, these have generally been confined to individual, larger credit events, indicating a risk that respondents saw as idiosyncratic rather than systemic, Leung said.
Consumers have shown surprising resilience, Leung said, possibly buoyed by low unemployment and low interest rates. Although some IACPM members are beginning to see an increase in stress levels among lower-income U.S. consumers, these are in line with pre-pandemic levels. "One of our members saw a 4% consumer default rate at her bank, which is about the same as it was before the pandemic," Leung said. "It's well short of the seven to eight percent we've seen in more stressed periods, which would be far more troubling."
IACPM members are looking out for a possible rise in unemployment and reduction in central bank lending rates, Leung said.
