UK downgrade: five experts on how devastating this blow is

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.’