U.S. Fixed Income Investors Offer Bleak View of 2009: Fitch Ratings

The recent stock market rally has been impressive, as are most bear market rallies.  In a way, the violent upswings of the market are almost as sickening as the downward slides—hence, the oft-used roller coaster analogy.  When the market lurches up, as it has over the past two weeks, investors must not get too euphoric, just as they should not get too depressed when it seems like the market can only go down.  Controlling emotions is very difficult during times like these (which, in many ways, are unprecedented), but it must be done for prudent investing.

This author has recommended investors looking for some stability and income streams for their portfolios to consider fixed income.  One suggestion has been investment in investment-grade corporate bonds rated AA or higher.  In light of a recent report from Fitch Ratings, which surveyed senior fixed income investors, I want to revisit this area.

Below, a press release from Fitch Ratings is reproduced, and it includes a link to the full report on the 2009 economic and credit outlook from senior fixed income investors (login required).  Notably, the survey found that the sector most expected to improve this year is financials.  This explains, in part, the stock market rally—while the S&P 500 is up over 20 percent, financials have rallied almost 60 percent!  This is most likely due to the Treasury’s announced programs, such as the Private-Public Investment Program, designed to tackle some of the so-called “toxic assets” on banks’ balance sheets.  Although it is tempting to jump into financials stocks or a sector exchange traded fund, equity investors are subject to market risk (known officially as systemic risk).  One way to avoid such risk, but still participate in improvement in the financial sector is to invest in corporate bonds of certain financials, such as Goldman Sachs or General Electric (GE is not a financial per se, but its GE Capital Corp. is a major lender and has dragged GE into the middle of the credit crisis).

Here is the Fitch Ratings release:

Fitch Ratings-New York-05 March 2009: A deep or very deep recession will grip the U.S., Europe and emerging markets over the coming year, and the economic downturn is likely to last one to two years across all regions, according to the most recent Fitch Ratings/Fixed Income Forum Survey of Senior Fixed Income Investors.The bi-annual survey, designed to provide insight into the opinions of professional money managers on the state of the U.S. credit markets, includes a wide range of questions targeting views on the economy, fundamental credit conditions across various asset classes and sectors, corporate strategies, and other market developments. In the recent survey, conducted in January, expectations for stability in the housing market were pushed further back, with 57% of respondents not expecting normal conditions to return before 2010. However, most investors believe that credit market stability will return sometime in 2009 (77% expressed this view). In a notable reversal from the mid 2008 survey, and clearly a consequence of the speed and severity of the economic downturn, the recent survey showed greater receptivity on the part of investors to the expanded role of government in the credit markets. Banks’ reluctance to lend received the most votes as a high risk to the credit markets over the next 12 months and nearly 40% of respondents believe that banks’ willingness to lend will not stabilize this year. Interestingly, the corporate area with the most votes (40%) for some improvement over the coming year was financials. However, 44% of investors also expected improvement among financials in the June 2008 survey. In fact, responses on the outlook for financials continued to be among the most diverse. Views were also notably divided on whether the bigger risk going forward is inflation or deflation. The full survey is titled ‘Grim 2009 Economic and Credit Market Outlook From Senior U.S. Fixed Income Investors’ and is available on Fitch’s web site at www.fitchratings.com under Credit Market Research. If you have trouble viewing the report, please follow this link http://www.fitchratings.com/corporate/reports/report_frame.cfm?rpt_id=428086 Contact: James Batterman +1-212-908-0385or Mariarosa Verde +1-212-908-0791, New York. Media Relations: Cindy Stoller, New York, Tel: +1 212 908 0526, Email: cindy.stoller@fitchratings.com. Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, ‘www.fitchratings.com’. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct‘ section of this site.

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