By Karen Brettell and Anastasija Johnson

NEW YORK, July 14 (Reuters) - Corporate credit investors
see no improvement in spreads over the near term, and until
credit markets turn, stock markets may also be unlikely to
escape the clutches of the bear.

A survey released on Monday by the International
Association of Credit Portfolio Managers (IACPM) found that
credit portfolio managers are expecting spreads to widen over
the next three months, a change from the most recent survey
taken in March when managers expected spreads to tighten.

This view contrasts with equity analysts who in the most
recent Reuters survey last month said they view stock indexes
as likely to rise through year-end, but end the year lower than
where they began. For details, see [ID:nL09485810]

"Credit default swap spreads imply that credit concerns
continue to remain elevated," said Gary Kelly, director of
research at Tradition Asiel Securities in New York.

"Elevated credit risk implies limited access to capital,
uncertainty towards underlying cashflows and potential for
further credit-related losses," he said. And, "tight credit
standards effectively cap equity market upside and create the
potential for further downside."

Both stock market and credit derivative indexes have been
battered over recent weeks on concerns that banks need to raise
more capital to pay for losses from residential mortgage debt.

Banks have been curtailing their lending to companies and
individuals alike as they dedicate capital to pay for mortgage
losses.

Tradition's Kelly uses a proprietary credit index, based on
moves in the most liquid credit default swaps, and compares
this against benchmark equity indexes including the S&P 500.

"Allowing for an overly pessimistic CDS market, we believe
the current CDS trend implies a reasonable trading level for
the S&P 500 index at 1150-1200," he said. "Alternatively, CDS
spreads across the market would need to narrow around 25
percent to support the current level of the S&P 500," Kelly
said.

The benchmark U.S. investment grade credit derivative index
has widened to 140 basis points, from a tight level of 86 basis
points in early May, according to Markit Intraday.

The S&P 500 index has dipped to 1,228 from more than 1,400
in May.

Dave Klein, senior research analyst at Credit Derivatives
Research, believes that credit and equity markets have moved
back in line with each other, after the credit markets earlier
this year greatly underperformed stocks.

Credit spreads weakened at a far greater pace than stocks,
a move that was later viewed as being exaggerated, as investors
fretted spread widening would trigger unwinds in some
structured credit products. [ID:nN22585145]

Since the rescue of Bear Stearns in March, the credit and
equity markets have come more in line, Klein said. As a general
rule of thumb, however, credit markets anticipate weakness or
improvement before stocks, "and the equities market confirms."

NEGATIVE SPREAD OUTLOOK

Expectations of further spread weakness then may not bode
well for stocks.

The IACPM survey of its members, which includes portfolio
managers at banks and other financial institutions in the U.S,
Europe and Asia, showed a strong consensus that spreads are
heading wider.

"Sentiment has clearly changed," said Som-lok Leung,
executive director at IACPM. "The view on defaults over the
last three quarters hasn't really changed, most people expect
defaults are going to go up," he said.

Spreads, however, capture more than just default risks, he
said.

"Spreads are a conglomeration of many things," he said.
"Defaults, market risk premium, liquidity and all these other
messier things are inherent in spreads."

Seventy-seven percent of respondents in IACPM's survey
expect the U.S. investment grade credit derivative index to
widen over the next three months, while 15 percent think it
will end unchanged and 9 percent think it will narrow.

Sixty-seven percent of respondents also believe the
European investment grade credit derivatives index will weaken,
compared to 23 percent who think it will end unchanged and 9
percent who think it will improve.
(Editing by James Dalgleish)