The outlook for credit defaults has worsened considerably in every global market since the end of 2013, according to a survey from the International Association of Credit Portfolio Managers.
The aggregate IACPM credit default outlook index fell to -14.6 as of March 31, down from 4.5 at the end of 2013. For Europe, the index fell to -4.4 from 14.2 and for Asia, to -47.4 from -11.2.
A negative number indicates credit conditions are expected to worsen, while positive numbers mean conditions are expected to improve.
Despite a pessimistic outlook regarding defaults over the next year, the survey has a positive outlook for credit spreads over the next three months. (Questions to surveyed portfolio managers covered different time periods for different segments.)
The overall Credit Spread Outlook index, including Asia, Australia, Europe and North America rose to 14.6 at the end of the first quarter, compared to 1.8 at the end of 2013. The outlook for European credit spreads improved to 25.6 from -5.1. The index for high-yield debt improved to 18.4 from 2.6.
Som-lok Leung, executive director of the IACPM, said in a telephone interview, that the seemingly “schizophrenic” results of the survey are the result of the different timeframes asked of portfolio managers.
“We've heard a couple of things anecdotally,” he said. “At the top of the list is the fact that we've had a fairly benign corporate default environment even though at the consumer level it's harder to feel the recovery in the (United) States.”
“Corporate default rates have been low and … it's hard to improve much. You can only get worse from there,” he added.
Mr. Leung added that expectations for rising interest rates also have a significant impact on the outlook for credit managers.
“There's that broad expectation for rising interest rates, certainly in the U.S., but in other parts of the world (too), that almost always has a negative impact on increased funding costs and puts more pressure on the firms that are on the edge.”
Regarding spreads, “in the near-term, there continues to be compression pressure on spreads driven, we believe, by the demand side,” said Mr. Leung. “There's a lot of cash chasing yield.”
IACPM members — 93 financial institutions located throughout the U.S., Europe, Asia, Africa and Australia — were surveyed at the beginning of April.