Markets and managers shrug off UK rating downgrade

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Moody’s Investors Service stripped the UK of its coveted AAA credit rating on Friday, although the move has been shrugged off by commentators as being of little surprise.

The credit ratings agency cut the country’s government bond rating by one notch to Aa1 after citing the weak medium-term growth outlook, the challenges this creates for the fiscal consolidation programme and a “deterioration” in the shock-absorption capacity of the government’s balance sheet.

In the financial markets, sterling dropped in trading in Asia as investors reacted to the news. The pound reached a 31-month low against the dollar and a 16-month low against the euro, while further declines are expected as trading gets underway in Europe.

However, the equity market appeared to shrug off the downgrade in early trading with the FTSE 100 rising 36.63 points to 6,372.33 in the first 20 minutes of the session. The gains were led by Antofagasta, Anglo American, Eurasian, Evraz and Barclays.

Economists and asset allocators also downplayed Moody’s move, pointing out a downgrade by one or more of the major ratings agencies has been expected for some time.

Liontrust Macro Equity Income fund co-manager Stephen Bailey says: “It has come as no surprise that Moody’s has stripped the UK of its triple A credit rating, although the execution of this downgrade appears to be rather late in our opinion.

“Sterling has already fallen in excess of 6 per cent against the dollar during 2013 and the perceived ‘safe haven’ status that was attached to the pound throughout 2012 has now diminished. All the negative factors contributing to the recent weakness were present during 2012 and yet the majority of investors and speculators choose to ignore these signals.”

Fidelity Worldwide Investment asset allocation director Trevor Greetham says: “There is a lesson here. Sometimes the ratings agencies are best ignored. They played a pernicious role in the run up to the financial crisis, assigning AAA ratings to flawed debt instruments linked to overheated housing markets. The damage to bank capital ratios when these investments turned sour is what created the credit crunch.

“Now, with economies facing sustained consumer deleveraging pressure as a result, the same ratings agencies have advised governments to add to the pain by implementing aggressive austerity plans when their economies need as much support as the markets will let them give.”

FundExpert.co.uk managing director Brian Dennehy adds: “For investors, the downgrade itself will have no lasting impact on the UK stockmarket. But it does reflect a weakness which is already beginning, I stress beginning, to have an impact on sterling.

“The recent weakness of sterling is a trend which I believe will persist for a year or two, which creates opportunities for UK investors. At the most simple level it gives a kicker to investments you hold overseas.”