Fund managers don’t share Fitch’s credit outlook

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Investment managers are “sanguine” on credit in contrast with Fitch Ratings, which says its global rating outlooks are more negative than a year ago across most sectors.

According to an analysis by the ratings agency investment managers universally expect credit markets to improve in 2017.

In the report Investment Managers Sanguine as Outlooks Turn Negative, Fitch forecasts a US default rate of 3 per cent, in line with 2014 and 2015 but slightly above the 2.3 per cent non-recessionary mark. The retail sector default rate could reach 9 per cent, it says.

In Europe Fitch expects the default rate to increase modestly to 1.5 per cent to 2 per cent. This is below the US and long-term average due to the ‘BB’ market bias and low refinancing pressure aided by ECB market support.

Fitch expects inflation to rise 2.3 per cent in the US and 2.8 per cent in the UK, but believes the Eurozone will sit at 1.3 per cent by the end of 2017. It forecasts US rates will be 1.25 per cent by the end of the year.

While some investors tout TIPS as the asset class of choice in an inflationary environment, others argue the reflation narrative is overdone.

However, there was a strong consensus among investment managers that market volatility would rise due to political risk, a view shared by Fitch, which highlights populism and trade protectionism as key threats.

The analysis found most investment managers have neutral to underweight duration positioning in their funds, but closer to neutral in US investment grade.