UK downgrade: top European fund managers react

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Here Citywire Global rounds-up the views of some leading fund manager and investment professionals to gauge how the UK's downgrade could affect the wider market.

Stewart Cowley, OMAM

Deeming the outcome of the downgrade a ‘good old-fashioned sterling crisis’, Old Mutual’s Stewart Cowley said he now has less than 50% of his Old Mutual Global Strategic Bond fund in sterling.

The markets have gotten the message to a certain degree; since the European Central Bank and the Federal Reserve offered the world unlimited support, long gilts have experienced double-digit annualised losses whilst the pound has fallen more than 10% against the euro.

We shouldn't expect dramatic events to overtake the markets in the near-term but it is difficult to imagine what the government or the Bank of England could do to change perceptions.

They are now boxed into a corner; there is no room for increased spending without a market shaking policy shift, further cuts will be political disaster and enhanced money printing (as endorsed by the out-going Governor of the Bank of England) would add to the hysteria surrounding the pound.

It doesn't look good no matter how you look at it. The UK bond and currency markets have been supported by the kindness of strangers in the past; much of our budget deficit has been financed by foreign owners of UK gilts

Take that support away and we are in trouble. Additionally, as gilt yields rise our interest bill will rise with it. In only the past four years interest being paid by the UK has doubled from £25 billion (€28.5 billion) to nearly £50 billion (€57 billion).

It is not too fanciful to say that this number will rise above £75 billion (€85 billion) in the next few years, propelled by higher gilt yields and persistent budget deficits.

David Robinson, DSP

The former Watch List candidate and lead manager on the Melchior Selected Trust European Opportunities believes the market had suitably prepared itself for the downgrade.

The downgrade was largely expected and priced in. See the limited reaction in the UK gilt market, which suggests that bond markets have not lost confidence in the UK government.

The British pound has already weakened significantly coming into this. The FTSE 100 is made up largely of multi-nationals, whose business activities and funding are geographically diversified.

UK multi-nationals/exporters will benefit from British pound weakness, while those companies in Europe that have a mismatch between costs in euro and revenue in pounds may be negatively impacted.

Jim Leaviss

The co-head of fixed income at M&G branded the rating itself as a 'White Elephant' which had become nothing more than a burden to the UK.

The downgrade to triple AA does not imply carnage - AAA to AA counts for around 20 basis points different in borrowing and it means the government can consider some fiscal stimulus. Lending rates are still low so let’s borrow some money for some infrastructure and get some growth going.

The rating is like a white elephant; a valuable but burdensome gift whose cost is out of all proportion with its worth. To lose it earlier rather than later would have given more help to the government. 

The UK is not triple AAA quality and has not been for some time but over the next decade all developed world credit ratings are likely to fall slowly down. Maybe just one or two countries will be left with AAA-ratings after this sovereign debt crisis- possibly just Australia and Canada.

Tim Albrecht, DWS

Despite the market falling initially, Euro Stars A-rated manager Tim Albrecht, who runs the DWS Deutschland fund, told Citywire Global in Frankfurt that the only surprise is it hadn't happened sooner.

'Markets have come down a lot anyway and I think they digested the news well.'

'We shouldn't be surprised by the downgrade given the economic figures coming out of Europe. The UK deficit and debt burden is very high. It's more surprising that it didn't come sooner.'

'The UK has to face austerity measures like any other debt-ridden economy. Of course, if you go in too strongly, then you see social imbalances - but that's something for the politicians to balance accordingly.'

Paras Anand, Fidelity

In a comment made almost immediately after the announcement was made over the weekend, Fidelity's head of European equities Paras Anand downplayed the overall impact of a downgrade.

The impact on sterling could be modest from here with the market having arguably moved ahead of the announcement.

However, the greater impact could be the evaporation of the fledgling optimism that the economy may be about to turn given improving employment numbers, recovery in house prices and the prospect of moderating austerity.

Toby Nangle, Threadneedle

Threadneedle's multi-asset head Nangle said the downgrade needed to be taken in the wider context of the European sovereign debt crisis, which shows this is a case of being more like Iceland than Greece for the UK.

Yields are low because the market believes that rates will remain low, and because of the Bank of England’s policy of quantitative easing.

By contrast, eurozone sovereign borrowing costs are dependent upon not only the expected course of ECB policy rates, but also market perceptions of creditworthiness, and so fiscally troubled sovereign yields are correspondingly varied.

The government’s frequent comparison between eurozone countries and the UK borrowing costs has served principally to explain to the public the benefits of pursuing a policy of fiscal restraint.

This is not to deny the large structural deficit that the UK has in place, nor deny that the main aim of the Treasury should be the eradication of this structural deficit. Economists and political parties of all colours agree on this point.

But the spectre of a rating downgrade as taking us towards the ‘market hell’ of Greece is not something of concern; ‘Market hell’ for the UK is not Greece, but Iceland: a precipitous collapse in the currency, the financial system, and domestic and international confidence. We are a long way from such a scenario playing out.