July 17 (Reuters) - (The following statement was released by the rating agency)
In its six-monthly The Credit Outlook report, Fitch Ratings says that increased market volatility due to speculation about the timing of monetary stimulus exit will drive sentiment in global credit markets during H213 and beyond, as evidence of firm economic growth remains elusive and suppressed risks are revealed in many sectors.
Emerging Market bonds, currencies and equities were hit hard in the recent market sell-off. Although improved sovereign credit fundamentals reduce the risks from tighter global liquidity, higher interest rates and FX risk, weaker EMs face challenges. Credit growth and shadow banking trends in China are raising concern about financial stability.
Historically low and stable base interest rates have supported recovering US and European housing markets, with improved loan affordability and asset performance in RMBS transactions. There are signs the increased rates may hamper turnover in this market which is central to broader economic recovery.
For banks, rising interest rates and a steepening yield curve will put pressure on investment portfolios and capital ratios as unrealised losses flow through financial statements. Market volatility will also affect funding costs and market access.
In the corporate sector, rising rates could slow the pace of issuance, especially for less well established, lower-quality credits, as investors turn more selective. Growth remains anemic, especially in Europe, and several sectors continue to struggle with excess capacity and weak cash flow generation.
Improving profits are mainly due to efficiency programmes, not top-line growth. The proportion of ratings on Negative Outlook or Watch remained elevated across most sectors during H113, reflecting weak economic conditions in many regions and the unresolved eurozone crisis. However, financial institutions, corporates and project finance noted modest 1-2pp reductions in this ratio. By contrast, sovereigns, international public finance and structured finance trended in the opposite direction. The rating mix deteriorated in most sectors but at a more moderate pace than in prior years.
The full ‘The Credit Outlook’ report provides an overview of Fitch’s outlook across all rated sectors and regions, identifying the main macro factors that will drive credit trends over the next 12-24 months. It is available at www.fitchratings.com or by clicking the link below.
Link to Fitch Ratings’ Report: The Credit Outlook