Fitch: U.S. fixed-income investor sentiment improves but stays gloomy

By Angela McDaniels

Tacoma, Wash., July 24 - Fitch Ratings said a survey it conducted in conjunction with the Fixed Income Forum found the outlook for both the U.S. economy and the credit markets much improved.

The agency said that compared with the January edition, the June survey shows a "far less dire view of the global recession and its impact, more concern about government intervention than arguably more serious event risks such as the collapse of a financial institution, a returned focus on inflation rather than deflation, and in some pockets of the credit markets, optimism for improving credit conditions over the coming year."

The view of the global economic downturn among respondents remains "gloomy" but "substantially less negative," according to a Fitch report on the survey.

More deem recession mild

The agency said the share of respondents placing the global recession's severity at "very deep" fell across all regions, especially in the United States and emerging markets.

The percentage of investors surveyed who believe the recession in the United States will be mild going forward rose to 23% in June from 2% in January, and investors with the same view for emerging markets grew to 43% from 8% over the same period.

Fitch said the outlook for Europe improved but remained the most negative, with 33% of investors expecting a very deep recession, roughly double the U.S. and emerging markets share.

The percentage of investors who believe the recession will be very deep in the United States was 16%, and the figure was 15% for the emerging markets.

Optimism seen for investment grade

Fitch said that in certain investment areas, investors showed the most positive views in several years.

Roughly two-thirds of investors believe that fundamental credit conditions will improve in the investment-grade corporate sector in the coming year, double the January share, and 40% of respondents expect some improvement over the coming year for high-yield corporate debt. The agency said these figures are the highest recorded in nearly two years.

For emerging market debt, 47% of respondents believe conditions will improve.

Alternatively, the percentage of investors who believe conditions will deteriorate was 15% for investment-grade corporate debt, 41% for high-yield corporate debt and 31% for emerging market debt.

Improvement expected for financials, energy

The U.S. corporate sectors deemed most likely to show improvement over the next year were financials and energy, with 78% and 77% of respondents expecting improvement, respectively. Basic materials followed with 63% of investors expecting improvement.

The percentage of investors who believe consumer cyclicals will show improvement over the coming year increased to 49% in June from 10% in January, Fitch said, and the 77% who expect improvement in the energy sector is much higher than the 20% recorded in January.

The U.S. corporate sectors considered most likely to deteriorate were media/broadcasting, health care and consumer cyclical. Roughly 37% of respondents believe these sectors will show deterioration over the coming year.

Default rate to decrease?

Fitch said that when asked to comment on the direction of the trailing 12-month U.S. high-yield default rate - which increased to more than 10% in the past year from just 1% in early 2008 - 45% of investors expect the default rate over the coming year to either remain the same or move moderately lower, and just 9% believe the rate will move significantly higher.

In contrast, no one surveyed in January believed that the rate would contract and 53% believed the rate would move significantly higher, the agency said.

Nearly 50% of the investors surveyed also expressed a view that corporate leverage will move lower over the coming year.

Responses surrounding fundamental conditions and the use of cash suggest that investors believe this will be a product of improving profitability and outright debt reduction, according to Fitch.

Fears of unintended consequences

When asked to evaluate event risks over the coming year, 60% of respondents said unintended effects of new regulation/legislation posed a high risk to the credit markets.

The survey found the next-riskiest potential market events to be geopolitical risks and excess reliance on foreign demand for U.S. fixed-income assets, with 43% and 41% of respondents marking these as posing a high risk.

While 57% of respondents to the January survey saw banks' reluctance to lend as a high risk, only 27% held that view in the recent survey, Fitch said.

Issuance rebound on the way

The agency said investors surveyed remained bullish on expectations for a continued increase in investment-grade corporate issuance in 2009, and most also expect volume to rebound in the speculative -grade corporate, residential mortgage-backed and asset-backed sectors sometime before the second quarter of 2010.

Specifically, 62% of respondents expect investment-grade issuance to rebound by the third quarter, and 24% expect the rebound to occur before the end of the year.

Responses were received from 131 senior investment personnel on their views of the economy, fundamental credit conditions across asset sectors and products, corporate strategies and other relevant topics.

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