Credit Market Research
www.fitchratings.com 17 August 2011
EMEA
European Senior Fixed-Income Investor Survey Q311
Investors Cut Expectations, Reassess Risks
Special Report
Risk Aversion:
Fitch Ratings latest quarterly survey (Q311) of fixed-income investors acrossEurope shows that, even before the early August market turmoil, investors had already sharplydowngraded their expectations for most fixed-income segments. Responses to the survey,which was conducted in the four weeks ending 29 July, reflected a greater aversion to risk, withmore negative expectations about credit fundamentals (Figure 1), issuance volumes andspreads.
Economic Growth Concerns:
Investor sentiment remains muted on growth prospects fordeveloped markets, in contrast to the optimism around emerging markets. The survey showsEuropean investors remain very bearish on the outlook for the European economy in the nextyear, with almost three-quarters of respondents expecting growth at below 2%. This sharplycontrasts with virtually all respondents expecting expansion by over 2% for emerging markets.
Reduced Risk of Inflation:
Expectations of inflation fell to their lowest point since Q410, with46% of participants expecting an increased risk from higher price levels, compared to a peak of68% in Q211. The result marks a turning point in expectations about inflation, which has beenon an upward path in consecutive quarters since Q310. This switch is likely to reflect increasedfears over the likelihood of a double-dip recession, with the proportion of investors ranking thisas a high risk threat to credit markets almost doubling to 40% from 21% in the prior quarter
Investment-Grade Corporates:
Investment-grade non-financial corporates took top spot asthe most favoured asset class, while the higher yielding speculative-grade corporate segmentmoved to second place. Cash also found favour, rising to joint third from sixth position in thelast quarter.
Fund Flows:
A majority of investors are expecting a slowdown of flows into fixed income. Overthe first half of 2011, funds focused on European debt have experienced regular outflows, whilehigh-yield, emerging-market and global-bond funds attracted investors in search of eitherhigher returns or safety away from the euro zone. The only novelty is the reversal of fortune ofhigh-yield funds, which saw outflows in June.
Figure 1
-0.4-0.3-0.2-0.10.00.10.20.3Sovereign -developedSovereign -emergingInvestment-grade -financialsInvestment-grade - non-financialsSpeculativegradeEmerging-marketcorporateStructuredfinance+1= Most optimistic-1= Most pessimisticMinimumMaximumCurrentPrevious
P e s s i m i s m O p t i m i s m
ª See Appendix for methodology and interpretation notes; scoring for data from six quarterly surveys betweenQ210-Q311, inclusiveSource: Fitch
Aggregate score, and historical range, by asset class
Survey Background
The Fitch Ratings Senior Fixed-Income Investor Survey wasestablished in 2007 and this is the14
th
edition. This survey garnered 93responses, representing the viewsof managers of an estimatedUSD4.3trn of fixed- income assetsduring the period 29 June to 29 July2011. Over 80% of respondentswere, by job function, fixed-incomeportfolio and investment managers,heads of fixed-income research, orstrategy, asset allocation, or othersenior managers from the largestasset management companies inwestern Europe. The balance wasrepresented by senior credit orsovereign analysts (please refer tothe appendix for more details).
Related Research
Senior Fixed Income U.S. Investor SentimentSlips on Growth (July 2011)The Credit Outlook - Fragility andInterconnectedness (July 2011)Predictive Accuracy Analysis of FitchEuropean Fixed-Income Investor Survey(July 2011)Europe Senior Fixed-Income Investor SurveyQ211; High-Yield Optimism Fades(May 2011)European Mutual Funds: A New Force inCredit (May 2011)
Analysts
Monica Insoll+44 20 3530 1060monica.insoll@fitchratings.comMichael Larsson+44 20 3530 1260michael.larsson@fitchratings.com
Investor Contact
Charles Marling+44 20 3530 1051charles.marling@fitchratings.com
Credit Market Research
European Senior Fixed-Income Investor Survey Q311August 2011
2
Economic Growth Fears
European investors are pessimistic about the outlook for economic growth for the regionbetween now and mid-2012. Almost three-quarters of survey respondents said that theybelieve European growth will be weak, at below 2%, while the balance expected GDP toincrease only by a moderate 2%-3%.In the recent Fitch/Fixed-Income Forum US investor survey, conducted in June, US investorsexpressed even more pessimistic forecasts for Europe. In response to the same question, 88%of US respondents said Europe would grow by less than 2%.European survey participants were slightly less negative on the prospects for the US, althougha majority of 56% still anticipated growth below 2%. US investors were somewhat less harsh in judging the outlook for their domestic economy, with a minority, 47%, believing growth wouldbe weak at below 2%.Common ground was most evident on the future fortunes of emerging-market economies, withvirtually all respondents in both Europe and the US expecting expansion by over 2%. Just overone-quarter thought growth would exceed 4%.On the impact to financial stability from a default on Greek sovereign debt, 91% of respondentsviewed the risk as moderate to high.
Figure 2
01020304050607080United StatesEuropeEmergingmarketsUnited StatesEuropeEmergingmarkets<1%1-2%2-3%>3%
What is the Outlook for Economic Growth Across the Following Regions Overthe Next 12 Months?
(%)Source: FitchEuropean investors' viewUS investors' view
Confidence Dented on Credit Fundamentals
The latest results display a marked reassessment of investor opinions about credit conditionsacross all asset classes. The Investor Sentiment Scale (Figure 1) shows current aggregatescores (red dots) in negative (ie, pessimistic) territory for all asset classes
–
a distinct shift fromthe position in the last quarter (gold rings).The ratio of investors expecting an improvement in current fundamental credit conditions wasoutnumbered by those expecting deterioration (0.6:1), representing a noticeable reversal fromthe ratio 1.6:1 recorded in the prior two quarters. The largest erosion in sentiment wasobserved for banks, with developed market sovereign debt (already firmly established innegative territory for many quarters) experiencing the smallest decline.Investor expectations for emerging-market (EM) corporate credit finally capitulated (0.9:1 from2.5:1 in Q211), breaking lower from consistently bullish expectations over the prior fourquarters (Figure 5). Sentiment for high yield (HY) extended its downward trajectory (0.5:1compared with 1.7:1); a trend that started in the last quarter, and which is reflected in recentfund flow data (see page 5).
Figure 3
High46%Low9%
The Risk of a GreekSovereign Default PosingSystemic Threat toFinancial Stability Acrossthe Eurozone is
Source: FitchMedium45%
”
These findings support F
itch’s view
that emerging-market dynamism isstill the main driver of the globalrecovery. However, as the agencynoted in its latest Global EconomicOutlook report, emerging-market
growth will slow from 2010’s levels
following a tightening in emerging-market monetary policy and theslowdown in so-called
“
advanced
”
country economic growth.
”
David Riley, Head of GlobalSovereign Ratings, Fitch
Credit Market Research
European Senior Fixed-Income Investor Survey Q311August 2011
3
Figure 4
13111171349314223313031184720534442491620252319241631220000102030405060708090100Sovereign-developed marketSovereign-emerging marketInvestment grade-financialsInvestment grade-non-financialsSpeculative gradeEmerging market corporateStructured financeDeteriorate significantlyDeteriorate somewhatStay the sameImprove somewhatImprove significantly
Over the Next 12 Months, Fundamental Credit Conditions in the Following
European Asset Classes Will…
(Q311)
Source: Fitch(%)
Higher Issuance to Prevail Despite Spread Widening
Investors trimmed expectations on issuance volumes from the prior quarter, but maintainedtheir bullish stance overall. Across the board, respondents anticipating higher issuancevolumes outpaced those foreseeing a decline by 2:1; down from 3.4:1 in Q211.
Figure 6
10001021513212313622385840544952524527362132382301341240102030405060708090100Sovereign-developed marketSovereign-emerging marketInvestment grade-financialsInvestment grade-non-financialsSpeculative gradeEmerging market corporateStructured financeDecrease by more than 25%Decrease by up to 25%Remain similar to LTM volumes Increase by up to 25%Increase by more than 25%
What Are Your Expectations for Issuance Over the Next 12 Months by theFollowing Categories? (Q311)
Source: Fitch(%)
Banks and HY experienced the largest declines in expectations, with the ratio of thoseexpecting higher issuance to those expecting lower issuance falling to 1.8:1 and 2.5:1,respectively, from 6.2:1 and 7.1:1 in the prior quarter.In the year to date (as of 8 August), overall European debt issuance has been healthy, runningalmost level with last year at USD2.7trn. Central government borrowing is down 15% atUSD988bn, although supranational issuance is up by two-thirds at USD137bn. Banks arerunning 7% behind at USD764bn, but corporates are 11% ahead with USD249bn issued(according to Dealogic data).Developed-market (DM) sovereign debt continues to be perceived by investors as the assetclass posing the greatest refinancing risk, with 70% of respondents selecting it over other assetclasses (Figure 8). The result continues an upward trend that began in Q410, when the assetclass received 51% of responses, and represents a return to the higher levels of concernobserved in Q210, when markets were awakening en masse to the extent of the debt problemsfacing sovereign borrowers in euro-zone economies. Views on the challenges to refinancingbank debt are broadly unchanged from those in the prior quarter (Figure 9).
Figure 5
102030405060Q210Q310Q410Q111Q211Q311Spec gradeEMBanks(%)
Over the Next 12 Months,Fundamental CreditConditions Will Improve(Signif. + Somewhat)
Source: Fitch
Figure 7
01234520092010YTD 2011CorporatesFinancialsSovereignSuprasOther
EMEA Issuance Volume
2009 - YTD 2011 (Corporates,Financials, CG and Supranationals)
(USDtrn)Source: Dealogic; N.B. Europe constitutes99% of EMEA issuance so far in 2011
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