Falling house prices have prompted half of Australia’s fixed-income investors to nominate a domestic housing market downturn as the top risk to the country’s credit markets over the next 12 months, according to Fitch Ratings‘ 4Q18 fixed-income investor survey.
House prices have been pushed lower by regulations and tighter lending standards, but external threats posed by trade wars also loom. Investors are concerned the trade wars may adversely affect China, with negative flow-on effects for a number of Australia’s other Asian trading partners. This led 82% of investors to expect Australian house prices to decline by between 2% and 10% over the next 12 months. However, broader economic deterioration is not envisaged, as 97% of investors believe unemployment will remain below 6.5% through to mid-2020.
More than 60% of investors responding to our 4Q18 survey believe commercial bank lending standards will tighten for high-yield corporates, SMEs and retail sector borrowers over the next 12 months in the wake of a Banking Royal Commission. At the same time, there is a noticeable rise in the proportion on investors expecting fundamental credit conditions to deteriorate for financials – up to 66%, from 48% in our 2Q18 survey.
Shareholder oriented activities remain the preferred use of cash for Australian corporates, according to 78% of survey respondents. This has been a consistent finding across our surveys to date, but 4Q18 survey investors indicated that corporates may have an increased appetite for M&A as a use for cash.
A majority of Australian fixed-income investors expect spreads to widen in four asset classes over the next 12 months: financials, non-financial corporates, structured finance (RMBS and ABS) and unrated. Likewise, when asked what they are willing to pay across a range of asset classes, investors indicated that a sustained period of compression appears to be coming to an end in seven of ten asset classes surveyed.
The 4Q18 survey was undertaken in partnership with KangaNews – a specialist publishing house that provides commentary on fixed-income markets in Australia and New Zealand. Findings represent the views of managers of more than AUD500 billion of fixed-income assets, accounting for over three-quarters of Australia’s domestic real-money market.
Fitch’s 4Q18 fixed-income investor survey was conducted between 27 August and 10 September 2018. This survey is unique in the Australian context, reflecting the partners’ strong ties with the local investor community.
