Morale in the financial sector may well be boosted by the latest findings from ratings agency Fitch. But can improved investor sentiment towards banks be relied upon in what may be a tough year for refinancing?
The 2012 Fitch Investor survey received responses from almost 100 senior investment executives in Europe, who cumulatively manage a total of funds equivalent to $7.1 trillion of fixed-income assets.
The results demonstrate that investors remain concerned about the likelihood of a ‘double dip’ recession. While geopolitical risk is a threat that many portfolio executives cite as important (on a periodic basis) it is – unsurprisingly – the sovereign debt problems that investors think is the largest risk by far.
Elsewhere, a quarter of respondents maintain that the wider financial crisis will worsen in 2012, while 24% foresee a more positive outlook, with the possibility of a solution to the credit crunch. Somewhat paradoxically though, the majority of those surveyed (67%) fear the prospect of a double dip recession.
This anxiety is corroborated by the varying spending patterns and inclinations of corporates; with an uncertain backdrop, they have now become more conservative by holding on to their cash, less confident about spending in the volatile market. Ed Parker, Managing Director, Global Sovereigns at Fitch Ratings comments in the report that the responses are synonymous with the agency’s view that, “The Eurozone crisis will persist, be punctuated by episodes of severe financial volatility, and not be resolved without a broad-based economic recovery.”
Figure 1, Source: Fitch
On a more positive note, investors are considerably less troubled about bank refinancing in the 2012 Q1 survey, whereas in Q4 2011, investors were even more anxious about the institutions’ instability than their concerns for sovereign refinancing risk (see figure 1). The surprise European Central Bank (ECB) action in December 2011, with its offer of longer term refinancing operations (LTROs), has no doubt played a role here.
Figure 2, Source: Fitch
This optimism is reflected in investors’ current choice of asset. Investment Grade (IG) financials have emerged as the second investment choice (27%) in the survey – a distinct improvement on previous survey results. But, a less pessimistic outlook towards the banks is not enough to ensure that investors will dive in – an end to the financial downturn is also crucial.
"Half of all respondents said that only a resolution of the Eurozone crisis will make banks investable again," said Monica Insoll, Managing Director in Fitch's Credit Market Research group. "High profile initiatives – such as increased capital, clarity on resolution legislation and imposing limits on assets for debt collateralisation – will not alone address this issue." So, for now, investment grade corporates remain the most favoured asset class.