UK debt-rating downgrade unlikely to make a great deal of difference to investors
Richard Bonnor-Moris (pictured), Head of Multi-Asset Solutions at Newscape Capital comments on the credit downgrade of the UK by Moody’s…
The credit downgrade of the UK by the Moody’s rating agency is unlikely to make a great deal of difference to investors. The downgrade itself was widely expected and with only Germany and Canada at triple A amongst the G7 the UK is now at the same level as the US and France.
If it is anything the downgrade is a reminder of the challenges the UK government faces going forward due to the combined effects of slow growth, low tax receipts and the mammoth debt commitments it has built up over recent years.
The probability of a default from the UK remains incredibly small, if for no other reason that the UK owns and controls its own currency so will always be able to pay its sterling commitments. The Moody’s message is related to the currency value risk; for foreign investors a depreciating sterling and for domestic lenders the negative real rates – with UK inflation remaining above Gilt yields over all periods.
As has been the case for at least two years of negative yields the only investment justification for holding Gilts is a belief that inflation will fall sharply or yields fall further due to risk aversion demand. The recent sharp fall in Sterling value reflects this risk. We don’t expect any direct policy or investor change in sentiment as a result of this downgrade, in fact for equities it may be viewed positively.
We also expect the UK to continue to be one of the beneficiaries not one of the victims of any ‘flight to safety’ that may result in a downshift in risk sentiment, for whatever reason, in the coming year.
Overall we will continue to hold little to no Gilt exposure as we have expected a steady drift higher in Gilt yields in the coming years. That said with the Bank of England still able and willing to buy any excess supply we think it remains highly unlikely that the UK experiences the painful forced rate rises seen in peripheral Europe as a result of this expected downgrade.
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