Ian Spreadbury: UK 'will lose' AAA rating

(Update) Fidelity bond fund manager Ian Spreadbury has dispelled any cheer over today's upwardly revised GDP figure, warning that if the UK economy continues to slow the country will lose its top AAA credit rating. 

Spreadbury, manager of the Fidelity Moneybuilder Income fund, a 'star pick' of Citywire Selection, said although a rating downgrade would not immediately cause the UK problems, it would pave the way for a spike in interest rates. He said it risked wider turmoil in the bond markets further down the line if investors grow disenchanted with the quantitative easing or 'money printing' policies of the Bank of England and the US Federal Reserve.

Spreadbury, who also manages the Fidelity Strategic Bond fund, said on a conference call with reporters: 'If growth continues to slow in the UK it's pretty clear we will lose our AAA rating', adding, 'When the market realises that QE is not creating real growth it will get concerned and impatient.'

He warned: 'If growth and inflation took a significant turn for the worse and investors could run scared of fixed interest – it's not likely to happen – but it could happen.'

Like many fund managers Spreadbury questions whether the unprecedented action by central banks to create new money to reinflate struggling economies actually has an economic benefit, other than to push up stock markets. Referring to the Fed's recent launch of 'QE3', the European Central Bank's planned intervention in eurozone bond markets with 'OMT' and the Bank of England's ongoing programme of creating £375 billion of new money to buy government bonds he asked, 'Where does it all end?'

Without a solution to the fundamental debt problems of leading economies the developed world risked a future of low growth, high inflation and significant 'tail risk', he said, a reference to the economic and market turmoil that would accompany a serious loss of faith in UK's credit rating.  

In February Moody's, a leading ratings agency, put the UK on 'negative outlook' which implies a 30% risk of losing its AAA rating in 18 months. The US suffered the historic loss of its AAA rating from Moody's rival Standard & Poor's last year, although the dollar's status as a safe haven currency minimised the impact of the downgrade.

UK economy shrank less in second quarter

Spreadbury's comments took some of the shine off the latest revision to the UK's second quarter GDP (gross domestic product) figure. According to the Office for National Statistics the UK economy shrank by 0.4% in the three months to the end of June, an improvement on two earlier estimates, which first put the contraction at -0.7% and then -0.5%. 

James Knightley, economist at ING bank, said he was becoming a bit more optimistic about medium-term prospects for the economy. 'Significantly, the report suggests that the squeeze on household finances is easing with real household disposable income rising 1.9% quarter on quarter, the largest quarterly rise since 2Q 2009. This leaves real after tax household incomes 1.7% higher than the same point last year,' he said.

The pound strengthened on currency makets gaining 0.16% against the dollar at $1.6191.

China move boosts markets

The FTSE 100 gained 23 points or 0.4% to 5,791 as markets revived after yesterday's sell-off caused by the unrest in Spain and Greece. The UK index was lifted after Asian markets rallied overnight in response to China’s central bank which revealed it had injected 365 billion yuan (£35.7 billion) into money markets this week. This inevitably fuelled speculation that China will take more steps to boost its slowing economy.

Anglo American (AAL.L), up nearly 2% to £18.66, led miners higher on the back of the news from China which could bolster demand for commodities.

Shire (SHP.L) jumped 2.5% to £18.39 to lead the FTSE 100 after Jefferies upgrade the drugs company to 'buy' from 'hold' saying the stock's recent performance was undeserved.

Tate & Lyle (TATE.L) was in hot pursuit, up 2.3% to 669p as the sweetener and starches maker and member of Citywire Top Stocks expected full-year profits to be up on last year despite the impact of the eurozone crisis on first half trading.

Compass Group (CPG.L) was not so fortunate, dropping  over 1% to 703.3p as investors worried about restructuring in the caterer's southern European operations, which offset an otherwise positive fourth quarter trading statement.

RBS (RBS.L) traded erratically but is currently 2.6p or 1% up at 257.7p. The Financial Times reported the bank would cut the offer price for its sale of around 30% of the shares in Direct Line, its general insurance arm. The paper said the initial public offering (IPO) would offer the shares at 175p, valuing the insurer at around £2.5 billion.

Also affecting sentiment towards banks was a call from the Bank of England's financial policy committee that banks should take advantage of any lull in eurozone turmoil to raise more capital from the markets.

Investors await Spain's new budget

There was a lull of kinds in the eurozone this morning as markets waited to hear what Spain's prime minister Mariano Rajoy will say about the first draft of his government’s 2013 budget at 1pm London time. The Euronext 100 index added three points or 0.5% to 655 as investors speculated whether the announcement of further savage cuts in government spending will make it more or less likely that Rajoy will request a European bailout. This would allow the ECB to support Spain’s government bond markets and lower its borrowing costs, which yesterday shot over 6%.

Other companies in the news

Two other Citywire Top Stocks are in the news.

Vodafone (VOD.L) recovered earlier losses to trade virtually unchanged at 177.25p after revealing it expects its acquisition of CWW to entail integration costs of £500 million and generate annual savings of £150 million to £200 million by 2016.

Imagination Technologies (IMG.L) recovered 6p or 1.3% to 476. Shares in the chip designer plunged nearly 10% yesterday after Texas Instruments, a long-term partner, said it was backing away from the smartphone and tablet markets.

Petrofac (PFC.L) gained 6p to £15.83 as the oil services firm won a $200 million (£123.5 million) project in Kuwait. 
  
Aviva (AV.L) firmed 2p to 323.5p as the insurer announced the sale of most of its Sri Lanka business to AIA Group for $109 million (£67.3 million)

And 3i Infrastructure (3IN.L) softened to 123.77p after the investment company’s first half trading update.