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Markets Shrug Off Triple-A Downgrade

MONDAY MARKET UPDATE: Equity markets in London continued to edge higher, indicating that investors were unruffled by Moody's downgrade to the UK's credit rating

Alanna Petroff 25 February, 2013 | 5:58PM

The FTSE 100 and FTSE 250 indices edged higher on Monday as investors demonstrated that they were relatively unfazed by the news that Moody's Investors Service had downgraded the UK's government bond ratings to Aa1 from Aaa. The downgrade had been expected by investors for some time.

This [downgrade is] a consequence of low or no economic growth and consistently high levels of debt

The large-cap FTSE 100 index added 20 points, or 0.3%, to close at 6,355. The mid-cap FTSE 250 index added 17 points, or 0.1%, to close at 13,686.

"Moody's Investors Service downgraded the domestic- and foreign-currency government bond ratings of the United Kingdom by one notch to Aa1 from Aaa on Friday, 22 February. The main driver underpinning Moody's decision to downgrade the UK's government bond rating to Aa1 is the increasing clarity that, despite considerable structural economic strengths, the UK's economic growth will remain sluggish over the next few years," said Gerard Lane, an analyst at Shore Capital.

Various professional investors and strategists weighed in on the credit rating downgrade. Here is a sample of their views:

Andrew Wells, global chief investment officer for fixed income, Fidelity Worldwide Investments:
“The UK’s downgrade from triple-A [was] very much priced-in and anticipated by professional investors. This is as a consequence of low or no economic growth and consistently high levels of debt. Challenging debt-to-GDP ratios are likely to see more events like this in 2013 from markets traditionally perceived as ‘high quality’ ... I don’t think savers need to worry about receiving a pound back on their UK Gilts. The worry is what that pound will buy internationally.”

Jim Leaviss, fund manager and head of retail fixed interest, M&G:
"In old Siam (now Thailand), kings would ruin unliked courtiers by presenting them with a white elephant – supposedly a badge of honour, but actually a dung producing money-pit. As Wikipedia describes it, nowadays a white elephant is an idiom for “a valuable but burdensome possession of which its owner cannot dispose and whose cost (particularly cost of upkeep) is out of proportion to its usefulness or worth”. The AAA credit rating that Moody’s gave to the UK was one such white elephant. A nice trophy to have, but one where the government believed that costs of upkeep included extreme austerity, now and into the future. The good news is that Moody’s has downgraded the UK, and best of all, has done so ahead of the Budget in March. The white elephant is dead, and now George Osborne can do a bit of fiscal stimulus – housing and infrastructure spending have huge positive growth multipliers, and can be justified easily, especially whilst gilt yields are so low. And if all else fails, we can always “QE” the yields lower still."

Stuart Welch, CEO, TD Direct Investing: 
“Looking at the facts, Moody’s decision to downgrade the UK from AAA to Aa1 hasn’t really come as surprise to the markets, with the FTSE 100 opening marginally up this morning ... Meanwhile, the money markets had already priced this into exchange rates and the pound had already been losing value ahead of the downgrade. This may push up the cost of people’s spending money abroad and the cost of exports into the UK, but conversely, it will also make our exports cheaper. My message to consumers is this - don’t get distracted. As far as traders and investors are concerned, this macro level news should not divert their attention from either their short term trading opportunities or their long-term savings plans.”

In equity markets, the main gainers on the FTSE 100 were Antofagasta (ANTO) and the Royal Bank of Scotland (RBS). The main losers were Pearson (PSON) and Reckitt Benckiser (RB.).

To see the top winners and losers on the FTSE 100 each day, check out Morningstar's Heat Map.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Antofagasta PLC855.00 GBX1.12-
Pearson PLC1,144.00 GBX-0.78-
Reckitt Benckiser Group PLC5,220.00 GBX0.29-
Royal Bank of Scotland Group (The) PLC354.00 GBX0.57-
About Author Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.