Credit Market Investors Wary: Fitch Ratings

While a significant rise in interest rates has fallen off the radar, concerns related to geopolitical risks have risen in the latest Fitch Ratings/Fixed Income investor survey. Expectations for economic growth have slipped as well, although 71% of respondents say that the unemployment rate in the United States will remain below 5%. In the prior version of the survey completed last fall, only 48% of respondents said unemployment would stay that low.

The survey, which was completed in early March, was conducted by Fitch Ratings and received 91 responses primarily from senior investors at traditional asset management firms and insurance companies. Other respondents include the asset management arms of banks and pension funds.

Nearly 90% of investors believe the corporate credit cycle has now tightened. The most exposed sectors are energy and basic materials. No particular surprise there.

Commercial bank lending has also tightened, according to nearly two-thirds of respondents. Fitch notes that this represents a dramatic downturn in expectations compared with the prior survey.
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More than two-thirds of investors expect at least a moderate increase in corporate leverage this year, and less than 10% expect leverage to expand. Mergers and acquisitions, share buybacks and dividends are all expected to take priority over capital spending. Again, no surprise here.

Fitch noted a wide range of opinion on valuation of investment-grade corporate debt. On emerging market corporate debt, however, most said that it was overvalued.

High-yield debt, if it is available at all for emerging market and speculative-grade companies, will command higher interest rates. That did not dissuade respondents from saying that high-yield debt is their second-choice investment, behind only investment-grade debt. That is a surprise.

While more than two-thirds think commodity prices have reached the floor, they also agree that price recovery will be slow.

Finally, half expect the economic challenges in China to result in a soft-landing for the country. More than a third, though, expect a hard landing. Our own comment on that is that the government will move heaven and earth to prevent a hard landing.