Moody’s likes to be first out of the gate. In 2013 it was the first major credit ratings agency to strip the UK of its “triple A” rating, downgrading it to Aa1 amidst austerity cuts. It wasn’t until after the Brexit vote more than three years later that S&P followed suit.
The ratings downgrade is not entirely unexpected but is a slap in the face for the UK government and its Brexit negotiations. It reflects the expectation that business uncertainty will persist and that getting out of Europe will take longer and cost more than anticipated, damaging the UK economy. It might take a while for S&P and Fitch to follow Moody’s but they likely will.
The UK now has a long term credit rating of Aa2. Moody’s states “Obligations rated Aa are judged to be of high quality and subject to very low credit risk”. The change is to the numerical modifier which has dropped from 1 (“higher end of the generic rating category”) to 2 (“a mid-range ranking”). It has given a “stable” outlook, indicating no imminent expectation of a re-rating.
S&P and Fitch have so far resisted any temptation to downgrade but it's only been a couple of days. S&P currently rates UK long term credit as AAu. The “u” denotes “unsolicited” indicating that neither the UK government nor an agent of the UK government has initiated the rating. S&P notes an AA rated obligation “differs from the highest rated obligation by a small degree. The obligor’s capacity to meet its financial commitment on the obligation is very strong”. S&P has already got the UK on a “negative watch” meaning that a further downgrade is possible but I would expect this to simply be the addition of a minus sign after the existing AAu rating, indicating a lower standing within the AA category. No cause for alarm.
Fitch, the third of the major credit rating agencies, uses a similar scale to S&P. It currently rates UK long term credit as AA and also has a negative outlook. It can move to AA- should it wish to “downgrade” the UK further.
We will not be making any changes to the portfolios as a result of this downgrade though we continue to be mindful of markets. With Brexit negotiations expected to take a long time there is going to be a long period of uncertainty for British businesses and therefore the economy. We will look for opportunities in that environment.
Caroline Shaw CFA, MEng (Hons), Dip PFS, IMC, Chartered MCSI
Head of Fund & Asset Management
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