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Advisers and fund managers downplay UK's downgrade

On Friday evening Moody's announced a downgrade of the UK sovereign credit rating from AAA to Aa1. Fund managers have widely shrugged off the downgrade. They cited a weak market reaction and argued it had more political than economic significance, although they have pointed to longer term worries such as rising inflation.

Keith Churchouse

Director

Chapters Financial

‘[Initial reaction] is not to panic, many of the markets have priced a possible downgrade in… it’s not new news for markets. Moody’s has also said it will not downgrade again for another 12-18 months so the reality is that there is some stability there, which is good.

‘We’ve just put a blog up on the topic. We try and address [this type of news] on our website and if their concerns continue then we’ll pick there and then.

‘Our phones have not been set alight on this issue.’

Michael McCroddan

Senior partner

Hanbury Wealth

‘I think this a temporary thing because the strength the euro has had effect on sterling, and the euro is still in problems but I don’t think it will have a material impact. We are still relatively strong against other currencies.

‘It’s not the shock that it could have been. The impact really is on George Osborne and the Conservative party.’

AJ Somal

Director

Aurora Financial Planning

‘I think it will have minimal impact because looking at the US situation you saw little impact on the market.

‘What we’ve seen in other counties is actually that the cost of borrowing went down following a downgrade, and maybe that will be the case in the UK as well. In the US it actually had the opposite effect.

‘We send out newsletters to clients with the news and let them know that we’re aware of the situation. There’s no knee jerk reaction off this news, we’re aware of this and we will work accordingly.’

Peter Lowman

Chief investment officer

Investment Quorum

‘The downgrade has been baked into the cake for a long time.

‘The chancellor was trying to pack in austerity to avoid it but as we’ve seen austerity has been difficult and everyone is questioning austerity and quantitative easing and saying “is this working?”’

 

Richard Jeffrey

Chief investment officer

Cazenove Capital

‘Changes in national ratings by the ratings agencies tend to reflect the blindingly obvious. Indeed, if the agencies had shown any degree of prescience, they would have warned about the implications of growing imbalances in the world economy years before they hit crisis levels.

‘That the UK is in a tricky economic position has been plain for all to see for a long period, both pre- and post-crisis. More to the point, perhaps, over the past few years the UK has been establishing a better base for growth. That growth has to be led by wealth creation in the private sector. This, in turn, has to be supported by confidence in the outlook for the world economy and in the UK government’s determination to rein in its own budgetary excesses.

‘As that confidence builds, then the UK will return to growth. Ironically, although the pace of that growth may seem disappointing in the context of pre-recession rates, it should be more sustainable.’

Craig Veysey

Head of fixed income

Sanlam Private Investments

‘Our view is that we are not expecting this to have a material impact on the gilt market in the near term. In the longer term this market is overvalued and there will be potentially some inflationary risks which investors need to protect themselves against.

Looking at the market reaction to other downgrades of top tier issues in the past like the US, Japan, and even France and Spain more recently, government bond yields have tended to drop a little following the initial downgrade from AAA status. Gilt yields are well priced for such a move from Moody’s.

‘In the near term, gilt yields are well capped, and this will continue with support from the Bank of England buying more gilts. Incoming governor Mark Carney will be more proactive in this respect.

John McNeill

Head of international rates

Kames Capital

‘The main reason for the action was the weakness of growth and the challenge this poses to the government's fiscal consolidation programme. We would agree that the UK debt and deficit trajectory are not consistent with an AAA-rating and Moody's action may be followed in time by S&P and Fitch, where the rating is currently on review for downgrade.

'The UK gilt market and sterling currency have already weakened significantly year-to-date. We believe that this can continue in the short-term. A more major risk to GBP assets would come from any political fall-out. A major deviation from the current fiscal plans or any fracturing in the coalition would be taken badly.’

Stephen Bailey

Co-manager

Liontrust Macro Equity Income fund

‘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% against the dollar during 2013 and the perceived "safe haven" status that was attached to the pound throughout 2012 has now diminished.

‘In our minds, a weak pound will perhaps make the UK more competitive but it will add to the inflationary pressures already present in our fragile economy.’

Richard Scott,

Chief investment officer

Hawksmoor Investment Management

‘I think it’s been made too much of, really. The reason for that is that chancellor George Osborne made a big thing of saying it would be a test to keep that rating. Moody’s are keeping the watch on “stable”, which is not true for France, so it’s not like the UK is suddenly at a grave risk that we weren’t at before.

‘There is more political symbolism there but in the economic reality, there has been little reaction, as speculation has been building for some time.

‘Sterling has been weak anyway in the past couple of months, so what has happened has reflected trends and events rather than a trigger for other things.’