UK credit rating downgraded.

25th February 2013

Ian Copelin, Investment Director, my wealth comments “The credit rating agency, Moody’s, downgraded the UK’s credit rating by one level to Aa1 from Aaa (the highest level) late on Friday evening (22 February 2013), citing weakness in the economy’s growth outlook and challenges to the government’s fiscal consolidation programme. Along with the downgrade, Moody’s changed its outlook on the UK to stable (from negative).

The move was not unexpected: all three of the big rating agencies – Moody’s; Standard & Poor’s and Fitch – had placed the UK’s rating on a negative outlook. The market is expecting the other agencies to follow suit shortly after George Osborne’s Budget on 20 March.

We aren’t expecting the market to be significantly impacted by the downgrade – especially as neither the US or France have been negatively impacted by their recent downgrades. When the US was downgraded by Standard & Poor’s (from AAA to AA+ which is the equivalent to Moody’s Aaa and Aa1 respectively) in August 2011, US treasuries yielded 2.5% – they have since fallen to just under 2% (coining the phrase ‘AA is the new AAA’ because there are few alternatives for those investors wanting liquid government debt).

The biggest impact of the downgrade could actually be in the value of sterling, as it is likely that the Bank of England will embark on a further round of quantitative easing (QE) to ensure that gilt yields don’t rise (which would negatively impact interest rates on the real economy) and to help stimulate economic growth. More QE could see the sterling weaken – although this will make our overseas holidays more expensive, a weaker pound is very positive for UK exporters, as it makes the UK much more competitive as their goods will be more attractively priced.

The FTSE-100 has opened stronger this morning despite the downgrade and is currently up 40 points at 6,375, while the benchmark 10 year gilt is unchanged with a yield of 2.108%.”