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Money Management

Credit managers more pessimistic on credit defaults; Europe, Asia diverge — survey

Credit portfolio managers believe defaults will increase over the next 12 months globally, according to the latest survey from the International Association of Credit Portfolio Managers.

The Credit Default Outlook index globally for the next 12 months is -36.3, up slightly from -38 in the previous quarter's 12-month survey. A negative number indicates credit conditions are expected to worsen, while positive numbers mean conditions are expected to improve.

Compared to the previous quarter, pessimism grew for Asia corporate credit, whose credit default outlook index dropped to -47.8 from -27.3 the previous quarter. Australia dropped slightly to -22.2 from -17.6, North America remained relatively steady at -41.7 compared to -41.2, while the outlook for Europe improved slightly to -21.9 from -30.3.

Among the surveyed credit portfolio managers, 66% believe European corporate defaults will remain unchanged over the next 12 months, compared to 36% who believe North American corporate defaults will remain unchanged over the same time period.

"It's more of the same in many ways," said Som-lok Leung, IACPM's executive director, in a telephone interview. "We've been in this space where defaults have been low, interest rates have been low, and a lot of the geopolitical risk that people see, the impact on that on markets is much less than it would have been in the past, which is surprising to a lot of people."

Among the surveyed credit portfolio managers, pessimism also grew slightly overall for credit spreads, believing credit spreads will widen over the next three months. The Major Markets Credit Spread Outlook index fell to -18.8 in the third quarter compared to -16.4 the previous quarter.

"There hasn't been a whole lot of change other than Europe," said Mr. Leung. "What's happening in Catalonia is certainly having some impact on worsening expectation on spreads in Europe."

European and North American outlooks went in opposite directions. The indexes for Europe and Europe crossover credit fell to -14.8 and -25.9, respectively, from zero and -3.1, while North American investment-grade and high-yield indexes rose to -17.2 each from -25 and -37.5, respectively.

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.