M&G’s Leaviss: UK credit downgrades increasingly likely

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Fund manager Jim Leaviss says one year on from Brexit credit ratings downgrades for the UK are looking “increasingly possible” as he notes he’s been underweight sterling since the country’s vote to leave the European Union.

S&P, Fitch and Moody’s immediately prepared to downgrade the UK when the Brexit referendum results were confirmed last year. All three credit ratings currently have a negative outlook for the UK.

Leaviss expects the impact of Brexit will largely depend on trading relationships.

“Importantly, higher trade barriers, if implemented, will adversely affect growth and productivity in the short to medium term.”

Leaviss says he does not expect a significant rise in gilt yields despite speculation the Conservative administration may apply less austerity and fiscal tightening following Theresa May’s bruising at the general election.

“The goal of reducing the UK’s debt/GDP over the next few years is likely to remain in place, but the ratings agencies are getting nervous, and further downgrades to the UK’s credit ratings are increasingly possible.”

The M&G head of retail fixed interest says instead of sterling he has a “sizeable” allocation to the US dollar, albeit reduced in the wake of the “Trump bounce”.

“Within bond markets, my favoured exposures include US dollar-denominated floating rate bonds from blue-chip banks and financial issuers, largely as a play on the strengthening US economy and rising US interest rates.”

Leaviss has some corporate bond exposure despite “very low” default rates stating they’ve performed so well over the last year that valuations have become less attractive.