Fitch Ratings has released its latest global credit outlook. The good news is that overall credit ratings outlooks are said to be improving in most sectors in developed market regions. The bad news is that credit rating outlooks are worsening in emerging markets, which is on top of having fallen for the past five years. In fact, Fitch said that emerging markets are now more negative than their developed market equivalents in core sectors.
One issue here is the strong dollar. Fitch points out that there is a correlation between a strengthening U.S. dollar and weakening emerging market sovereign credit worthiness, as falling U.S. dollar incomes can affect credit fundamentals.
Fitch’s sector outlooks have a more negative bias than its rating outlooks for 2016. It said the following sector views:
- Some 27% of sectors have a negative outlook, up from 14% at the start of 2015.
- Sectors under pressure include energy and commodities, retail and banking systems in many emerging markets (and in Canada).
- Positive sector outlooks apply to structured finance in the United States and Europe, although there is concern in CLOs and U.S. CMBS.
Fitch expects global economic growth to rise modestly to 2.6% in 2016, from 2.3% in 2015. This was said to partly reflect a smaller contraction in Brazil and stabilization in Russia. Still, Fitch expects that China will continue to decelerate.
Key risks to global growth are a more rapid China slow-down and a more pronounced impact from the U.S. rate rise than forecast. Consumption-led growth in the United States has led to divergent monetary policies: the U.S. Federal Reserve is tightening while other major central banks are still loosening. Another concern is that private and public debt in many emerging markets are close to all-time highs.
Fitch added in that the strengthening U.S. dollar raises servicing costs for local-currency debt and risks causing asset quality weakening for banks, notably in nations like Brazil, Russia and Turkey.
The other issue brought up is the environment of low commodity prices. Fitch points out that low commodity price are the greatest risk to emerging market sovereign ratings. After all, emerging markets generally are considered to be net exporters of commodities (outside of India and China).
Corporate sectors under pressure include oil, gas, metals and mining. The impact of sharp capital spending declines in those sectors has spread to related sectors like outsourcers and machinery providers. Reduced revenues then have a local multiplier effect of sorts: a negative impact on local and regional public finances in energy regions’ corporate tax revenues.
There is a word of caution for U.S. companies that have leveraged up their books. These are partly to fund share buybacks, and Fitch now sees the rating headroom being more limited, or that credit ratings upgrades will be fewer. Fitch went a step further:
This could prove challenging as more negative credit conditions develop. Risk is concentrated in the energy sector, where we expect a US High-Yield default rate of 11% in 2016.
A default rate of 11% in 2016? That is not good, and the typical junk bond fund is not posting a yield of over 11%.
Sponsored: Find a Qualified Financial Advisor
Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.