As the U.S. trade war with China escalates, the U.S. government's 90-day tariff pause for other regions has done nothing to improve the investment outlook for credit portfolio managers at global banks, who manage retail and corporate loans.
International Association of Credit Portfolio Managers (IACPM) members responding to the association's first quarter 2025 Credit Outlook Survey are maintaining their negative outlook on the global economy and continue to expect corporate and consumer defaults, wider spreads and a growing risk of recession.
The IACPM Credit Outlook Survey, conducted just before the U.S. government's "Liberation Day" and its subsequent 90-day pause, found that the majority of respondents believed credit defaults would increase in every region of the world from North America to Europe, Asia and Australia. Two thirds of respondents said they expected rising defaults among consumers and home buyers. Respondents also saw an increased chance of recession.
The market is being whipsawed, and the moves don't change respondents' sentiments.
This view remains unchanged despite the government's tariff pause, said Som-lok Leung, the IACPM's executive director.
"The market is being whipsawed, and the moves don't change respondents' sentiments," he said. "The outlook was negative when we did the survey, and, if we were to do the survey today, probably it would be even more negative."
Leung sees the tariff policy reversal as just another sign of the market uncertainty.
"With the type of volatility coming out of Washington, it is very difficult to forecast what will happen," he said. "Portfolio managers are having to change their plans constantly as new information arises, so they can't make a plan and stick to it."
Portfolio managers with credit investments need to watch their borrowers' situations and the effect that these loans have on the overall risk exposure of their credit portfolios.
Lending continues despite uncertainty
Respondents said the high level of uncertainty meant financial decision-making had become more difficult, since uncertainty is never good for business, investment or underwriting.
North American five-year, investment-grade credit spreads will increase, predicted 63% of the IACPM 's survey respondents, while 55% thought five-year investment grade spreads would widen in Europe.
Despite the new economic environment and recessionary outlook, which raise the bar for credit and makes credit extensions more challenging, many portfolio managers believe banks will continue to make new loans.
The uncertain economic outlook is driving borrowers to banks looking for support. And banks are keen to serve their customers, Leung said. "There's a lot of dry powder out there and a lot of financial institutions will be keen to demonstrate that they will be there for clients throughout the cycle."
IACPM managers mostly run a client-facing business, rather than a bond fund, so they are keen to maintain their customer relationships.
"Banks are obviously worried about their own risk, but they're also strategizing about how they can continue to serve their clients," said Leung. "And this is one of the things that really came through very clearly when we were talking to our members."
Opportunities abroad
As spread prospects widen globally, credit investment managers are eyeing European opportunities, where rising defense and infrastructure spending are creating business opportunities, the IACPM survey found.
A number of IACPM members say Europe has room to maneuver, with a stronger euro and lower prices, which could lead to lower inflation.
"The euro has been increasing against the dollar, and a stronger euro, lower prices, and inflation are going to support rate cuts from the ECB," Leung said.
The IACPM's quarterly surveys are calculated as a series of diffusion indices, reflecting the number of respondents with negative or positive outlooks and the number of those whose outlook is unchanged. The IACPM's members comprise over 150 financial institutions in over 30 countries.
