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Credit manager optimism grows, lower defaults forecast — IACPM survey

The latest Credit Outlook survey from the International Association of Credit Portfolio Managers, or IACPM, found that credit portfolio managers have a positive outlook for every region of the world and every sector in the survey except commercial real estate, which is essentially neutral.

"The amount of stimulus pumped into the system has been critical to providing an underpinning for businesses, as well as consumers," said Som-lok Leung, executive director of the IACPM. "As one of our members notes, from a default perspective, the stimulus has reduced the threat of default and every day this continues, it's one more day for businesses to repair their balance sheets."

In fact, the Aggregate Credit Default Index is slightly positive, at 2.6 in the latest reading, versus -90.3 at the beginning of the coronavirus pandemic last March.

Respondents, though, noted fears surrounding inflation. However, survey respondents said they are not convinced recent price increases are structural or long term in nature and pointed to evidence that many of the increases are short term and transitory. Respondents said they are weighing that evidence against other data indicating at least some of the increases are indeed structural and could pose significant long-term problems.

"There are a number of structural issues that are being closely watched," said Leung. "Some of the inflation we're seeing could be transitory but some of it could be systemic. Additionally, given the amount of stimulus, you can ask yourself, how will all of this be unwound? Higher interest rates are on the table but maybe it could also require higher taxes in some countries."

On a risk assessment basis, survey respondents said they are now far more willing to carry or even add additional risk to their portfolios. In the March 2020 survey, respondents delivered a negative index reading of -38.1 in terms of their willingness to add risk. By June last year, respondents' appetite for risk was even lower at -42.6. However, as new stimulus began to appear last year, risk appetite among respondents improved to a -15.9 in September and -7.0 in December. But as 2021 got underway and even more stimulus came into the economy, risk appetite climbed to 4.2 in March and 20.5 in the last reading in the current survey.

And from a default perspective, respondents forecast lower defaults globally over the next 12 months, but at different levels in different parts of the world. The most striking change in this survey is the outlook for European corporate debt among respondents. Three months ago, respondents gave Europe a -31.4 reading in terms of corporate credit defaults. In the latest survey, the European forecast has improved to 12.1. Respondents noted that not much has happened on a macro level. However, the European Central Bank has still been accommodative, and European governments have been pushed to do more.

The credit outlook survey is conducted among members of the IACPM, an association of 125 financial institutions across 26 countries. Members include portfolio managers at many of the world's largest commercial banks, investment banks and insurance companies as well as a number of asset managers. Members are surveyed at the beginning of each quarter.

Survey results are calculated as diffusion indexes, which show positive and negative values ranging from 100 to -100, as well as no change, which is in the middle of the scale and is recorded as 0.0. Positive numbers signify an expectation for improved credit conditions, specifically fewer defaults and narrower spreads, while negative numbers indicate expectations for deterioration with higher defaults and wider spreads.