Investors increasingly expect fundamental credit conditions to deteriorate and they are particularly gloomy about the prospects for sovereigns, research by Fitch has found.
A Q2 survey of investors by the rating agency found that 55% of respondents anticipated worsening credit conditions for sovereigns, up from 24% in the last quarter. This negative outlook appears to reflect rising fears of recession and low expectations around inflation.
Overall, 86% rate prolonged recession as a high risk to the European credit markets, up from 69% last quarter and an all-time-high. Eurozone sovereign debt problems are ranked as the second-highest risk.
Some 41% of respondents believe the worst of the eurozone crisis is over. But 29% think the market calm is temporary and 30% say markets are irrationally exuberant, ignoring the weak economic outlook for Europe. Worryingly, four-fifths of investors (80%) interpret the Cyprus bank resolution as a precedent that removes implicit sovereign support from bank senior debt.
Just over half of investors (56%) are concerned that the increasing scarcity of high-grade bonds may lead to a repricing of debt that has historically been regarded as ‘risk-free’, for example, sovereign bonds. Less than a third (27%) said high-yield bonds were their most favoured investment choice, down from 29% last quarter, but still clearly ahead of the runners-up – emerging-market corporates (16%) and banks (15%).
Fitch conducted its Q2 survey between 3 April and 7 May. It reflects the views of more than 100 senior fixed-income executives.
Sally Percy is editor of The Treasurer