Wealth Manager - the site for professional investment managers

Register free for our breaking news email alerts with analysis and cutting edge commentary from our award winning team. Registration only takes a minute.

UK's AAA downgrade: why the ratings agencies are best ignored

UK's AAA downgrade: why the ratings agencies are best ignored

The pound is set to pull back further following Moody's decision to strip the UK of its prized AAA rating.

Although the downgrade to Aa1 came as little surprise given Britain's weak growth and huge debt burden, sterling, which has already been under pressure, is set to take much of the strain following the ratings agency's decision.

Unlike the US, the UK does not have the same luxury of blaming the loss of its AAA badge on the dismal global economy.  In Britain the problems are also domestic, and this is painfully clear to investors.

Aberdeen Asset Management's Paul Griffiths, co-global head of fixed income, argued that over the longer term the UK's borrowing costs are likely to rise, but the most immediate impact of Moody's downgrade will be felt elsewhere.

He said: 'The more immediate concern is likely to be a further weakening of the pound, which has already had a move lower in the first few weeks of this year.

'This will be immediately beneficial for our exporters but the medium-term risk is that this sees inflation imported with the rising cost of good and services from abroad.'

Ultimately, such an effect would not be supportive for gilts, even if over the near-term they are protected because a significant proportion are bought by overseas investors with the choice of where to invest.  At the margin some of them might decide to trim their holdings following the downgrade.

Trevor Greetham, Fidelity's asset allocation director, went further than to say there would be little impact on the back of Moody's Friday night announcement, and said sometimes ratings agencies should simply be 'ignored'.

Even though the US was offered some shelter on the back of its downgrade because investors continued to view American paper as a safe haven, causing treasury yields and the dollar to rally, Greetham pointed out the cut in the US' credit status was a little ironic given policy makers had delayed spending cuts.

'It was a deferral of government cuts that lost America its AAA rating in August 2011, but the US strategy of putting off fiscal tightening until the economy was stronger looks to be paying off,' he pointed out.

'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,' Greetham added.

He continued: '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.'

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.
Citywire TV
Play CEO Tapes: Buxton to Gilbert - ‘my Glencore quandary’

CEO Tapes: Buxton to Gilbert - ‘my Glencore quandary’

Do not miss the first two minutes of this film as Richard Buxton shares how he has been challenged by a client for owning shares in a certain company.

Play CEO Tapes: the huge opportunities for asset managers

CEO Tapes: the huge opportunities for asset managers

From tech disruption, retirement and poaching, the CEO discuss the opportunities for their businesses in this episode.

Play CEO Tapes: 'we're just a bunch of white dudes sitting here'

CEO Tapes: 'we're just a bunch of white dudes sitting here'

In our brand new series, eight CEOs discuss how the industry could do a better job for female fund managers.

Read More
Your Business: Cover Star Club

Profile: how career burnout led to a family office launch

Profile: how career burnout led to a family office launch

I was burnt-out from a career in finance and had no desire to come back, says the founder of Blu Family Office

Wealth Manager on Twitter