The wall of government stimulus that has flooded markets and the economy has significantly reduced fears of credit defaults globally, according to the latest credit outlook survey from the International Association of Credit Portfolio Managers.
The Aggregate Credit Default Index is a slightly positive 2.6 in the latest reading versus negative -90.3 at the beginning of the coronavirus pandemic last March.
“The amount of stimulus pumped into the system has been critical to providing an underpinning for businesses, as well as consumers,” commented 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.”
All the stimulus has also resulted in substantial and continuing concern about inflation. At the same time, though, survey respondents are not convinced recent price increases are structural or long term in nature. They point out there is a lot of evidence many of the increases are short term and transitory. Respondents 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.”
Taking more risk
After backing away from taking on additional risk at the beginning of the pandemic in March last year, survey respondents 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 minus -42.6. However, as new stimulus began to appear last year, risk appetite improved to a still negative -15.9 in September and minus -7.0 in December. As 2021 got underway and even more stimulus came into the economy, risk appetite climbed to positive 4.2 in March and 20.5 in the last reading in the current survey.
“Fear of immediate disaster has receded,” said Mr. Leung. “For the moment, there are far fewer concerns.”
Survey respondents are uncertain how long current credit conditions will last but they point to several factors they are closely watching. Factors include changes in the pandemic, including the rise of variants such as the Delta virus, supply chain disruptions, and especially central bank responses to inflation. If central banks take a gradual approach, though, respondents are hopeful there will not be any major disruptions.