Credit managers continue to believe credit defaults will increase over the next 12 months, although the overall sentiment is improving, according to the latest quarterly survey from the International Association of Credit Portfolio Managers.
The Credit Default Outlook index for the next 12 months is -37.9, up from -48.1. A negative number indicates credit conditions are expected to worsen, while positive numbers mean conditions are expected to improve. The credit default index specifically in the corporate sector rose to -29.6 from -50 the previous quarter, the best of all sectors, while the average retail/consumer mortgage credit default index rose to -41.3 from -44.4, and the commercial real estate credit default index rose to -43.5 from -49.4.
By region, the North American region saw the greatest improvement, with 36% of credit managers believing North American credit defaults will increase, down from 66% the previous quarter. North America's credit default outlook index improved to -13.9 from -55.3 the previous quarter.
Also, 65% of credit managers believe Asian corporate credit defaults will increase, down from 67% the previous quarter. And 50% thought European corporate credit defaults will increase, down from 58% the previous quarter.
Som-lok Leung, IACPM's executive director, said in a telephone interview the primary driver behind the improved outlook in North America was the Federal Reserve's recent action to raise the federal funds rate to 0.25% to 0.50%.
“Most people don't like to bet against the Fed and the Fed is raising interest rates and they're not going to do that unless they believe the economy is going well,” Mr. Leung said.
He also said some stabilization in oil and gas prices also contributed to the improved outlook.
“The firms that will go belly up have already done so and the current participants that are around can remain around at these prices,” Mr. Leung said. “At least it's in a range that will keep people in the business in the short term.”
Continued uncertainty with geopolitical sources have contributed to the continuing caution, however, Mr. Leung said, citing uncertainty about President-elect Donald Trump's economic policies and continued unsettled times in the Middle East and the South China Sea.
The survey is conducted among IACPM members, which consist of credit portfolio managers at more than 90 financial institutions in the U.S., Europe, Asia, Africa and Australia.