Standard & Poor’s ‘humiliating’ decision to strip the US of its AAA credit rating is an opportunity for investors to reassess their risk appetite and could lead to a cheap asset bonanza, some fund managers believe.
In the wake of Friday’s announcement of the first ever US rating downgrade, the international financial community today assessed the potential impact the credit agency’s reappraisal could have.
Credit agency Standard & Poor’s directly attributed its decision to downgrade the US to the failure of policymakers to reach a fiscal consolidation plan which would help stabilise the government’s ‘medium-term debt dynamics’.
Fund managers and investment firms were quick to criticise the ‘clumsy’ handling of the US debt ceiling crisis, which was resolved at the 11th hour following a long-running stand-off between Republican and Democratic representatives.
Dominic Rossi, global chief investment officer at Fidelity International, said: ‘My overall view is that the decision is of huge significance. It is humiliating for the government and it is an indictment of the Federal system. It also undermines the world reserve currency, and raises the prospect of stagflation.’
Rossi did state that the downgrade could be turned to the benefit of investors, if political differences could be put aside by the Republican and Democratic parties.
He said: ‘Good can come from the S&P downgrade, if this humiliation stirs Washington into action. The risk is they will focus on the AAA ratings from the other agencies, and bad mouth S&P instead.’
JP Morgan Asset Management said it did not envisage a US recession in the near future but said there was ‘significant’ tail-risk. In its latest global strategy analysis, the group said that whether the US economy is stalling would be of great importance over the next three-to-six months.
A coalition of investors had written to President Obama and Congressmen during the debt ceiling debate to warn of the potential knock-on effect of a short-term fix solution to the crisis. The coalition warned that the drawn-out debate could lead to a downgrade which would drive investors away from the US market.
Meanwhile, other fund managers and investment firms have suggested the downgrade could be turned to a positive, with the potential to acquire low-cost assets emerging.
In a snap response issued today, asset management firm Schroders said: ‘We need to continue to monitor the cycle closely and be ready to take advantage of it in spite of our bigger picture concerns. Clearly the performance of emerging economies, and China in particular, will be critical to this call.’
‘In our own funds, we are unlikely to de-risk further and are looking for opportunities to pick up cheap assets.’
BlackRock, which had been at the forefront of the coalition that wrote to US policymakers, said the downgrade had been a possibility for the past month and that it ‘does not imply a fundamental increase in risk’.
For this reason, BlackRock said it did not expect investor behaviour to change significantly. However, the company did state: ‘In combination with continued economic weakness and regulatory uncertainty, this may provide a signal to some investors to reassess their risk appetite.’
Further to this, BlackRock was also critical of the political wrangling that had led to the downgrade in the first instance and called for greater co-operation between policymakers in the future to ensure that a repeat of the situation is repeated.
‘The US economy has historically been the world’s most resilient,’ the company said. ‘’But its future depends on policymakers coming together to make hard decisions needed to arrest the growth of the US public deficit.’
There remains the outline possibility that other credit agencies could also downgrade the United States, with Moody’s stating that it too would strip the country of its AAA-rating if its fiscal and economic outlook was not improved by 2013.