Fitch: Weaker Credit Sentiment Impacting Australian Spreads

Australian investors remain downbeat in their outlook for credit, with more than half expecting fundamental credit conditions for financials and corporates to deteriorate over the next 12 months, according to Fitch Ratings' fifth fixed-income investor survey.

The survey was undertaken in partnership with KangaNews - a specialist publishing house that provides commentary on fixed income markets in Australia and New Zealand.

The survey showed investors regard access to funding as the greatest risk to bank credit risk and identified financials as the asset class facing the greatest refinancing challenge.

The impact of the dour outlook for credit conditions is reflected in investor expectations for spreads. Most notably, there has been a shift in sentiment for sovereign credit, with 44% expecting spreads to widen over the next 12 months compared to just 18% in the previous Q415 survey. Similarly, the percentage of investors expecting covered bond spreads to widen has doubled.

Fitch also asked investors the spread they would be prepared to pay for primary market issues across a number of asset classes. Results varied widely, but disparity was most pronounced in the spread sought for Big-Four bank Tier 2 bonds and non-financial corporate bonds rated 'A' and 'BBB'.

China has been considered the most serious risk posed to Australian credit markets in each of the five surveys undertaken. While China still tops the list, concern around all four top risks eased slightly in the 2Q16 survey.

Investors' views are mixed on a range of macro-economic indicators. A more pessimistic outlook prevails for the direction of Australian house prices, compared to the 4Q15 survey. This is despite 52% expecting further interest rate cuts. However, investors are generally upbeat about the outlook for unemployment, with all respondents expecting the rate to settle between 5.5% and 6.5% over the next 12 months.

Fitch's 2Q16 fixed-income investor survey was conducted between 29 February and 11 March 2016, representing the views of managers of more than AUD250bn of fixed income assets. This accounts for over three-quarters of the Australian domestic real-money market. This survey is unique in the Australian context, reflecting the partners' strong ties with the local investor community.