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Economy
US Debt Rating
US debt downgrade: Still the King among equals? The S&P on Friday downgraded
the long-term debt rating of the US from AAA to AA+ and continued with its negative
outlook. This could lead to some immediate turbulence in financial markets, however,
investors are likely to focus on ‘relative’ ratings in their investment decisions. With no
precedence of such an event, financial markets could take some time to factor in the
implications. In the meanwhile, asset allocation in the immediate near term may be
biased more towards gold. Indian equities could also see a downward momentum as
risk aversion remains a dominant theme. Reflecting this, INR could also see some
depreciation bias in the near term.
Debt downgrade moves investment decisions into uncharted territory
In an unprecedented move, US long-term debt rating was downgraded by one notch to AA+ while
maintaining a negative outlook by S&P. Moody’s and Fitch, however, have maintained the highest
ratings for US debt. S&P points to broad concerns on achieving political consensus along with the
fiscal consolidation plan falling short of the amount needed to stabilize the debt burden over the
long run. The US debt ceiling agreement called for expenditure cuts of US$2.4 tn to be decided in
two tranches of US$917 bn immediately and US$1.5 tn to be recommended in November 2011.
Questions were, however, raised on the S&P’s assumptions of the pace of discretionary spending
in fixing the trajectory for the debt. The S&P clarified that the assumptions were not material
enough considering that the debt projection was at US$14.5 tn (79% of CY2015E GDP) versus
US$14.7 tn (81% of CY2015E GDP) with the initial assumption. The material difference
amounting to US$2 tn could only be seen if the projections were extended to CY2021E.
‘Relative’ ratings will be a key issue; knee-jerk reactions will be the order of the day
Even though US debt rating is no longer the coveted AAA, we do not see debt markets elsewhere
as a ‘safe haven’. Compared to the US economy, we believe that the European economies are
facing a more serious situation as the inter-holding of debt between the Euro zone economies
raises serious contagion issues. The ECB in its recent policy meeting agreed to start off again with
the bond purchases but restricted itself to purchasing Portuguese and Irish bonds while the market
was expecting some support in the Spanish or Italian bonds. In our opinion, much of the ratings
downgrade could have already been priced in during the last few trading sessions. Despite this,
the near term is likely to see some knee-jerk reactions to this news with strong volatility likely as
investors come to terms with the new reality of a US rating downgrade. In the interim, gold could
be the only safe haven asset and could see some price rises. For the longer term, we believe that
investors could focus more on the US growth aspects. US growth, in turn, could see some
downward bias as fiscal austerity kicks in and there could now be serious limitations on any further
liquidity injection in the US markets.
Indian equities likely to maintain a downward momentum and depreciation likely in INR
Indian equity markets could also see turbulence in the near term. However, there could be some
silver linings as the US economy slows on account of fiscal austerity. Any significant slowdown in
the global economies could lead to a downward bias for the commodity prices, a factor that is
likely to be most beneficial for emerging markets like India. India’s growth also remains relatively
resilient (our estimates at 7.3% for FY2012E) and hence, it is unlikely to see significant outflows.
However, our policy call for the RBI to increase the repo rate by a further 25-50 bps could be put
to test in the event that commodity prices globally come down sharply and risk aversion is
significant.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
US Debt Rating
US debt downgrade: Still the King among equals? The S&P on Friday downgraded
the long-term debt rating of the US from AAA to AA+ and continued with its negative
outlook. This could lead to some immediate turbulence in financial markets, however,
investors are likely to focus on ‘relative’ ratings in their investment decisions. With no
precedence of such an event, financial markets could take some time to factor in the
implications. In the meanwhile, asset allocation in the immediate near term may be
biased more towards gold. Indian equities could also see a downward momentum as
risk aversion remains a dominant theme. Reflecting this, INR could also see some
depreciation bias in the near term.
Debt downgrade moves investment decisions into uncharted territory
In an unprecedented move, US long-term debt rating was downgraded by one notch to AA+ while
maintaining a negative outlook by S&P. Moody’s and Fitch, however, have maintained the highest
ratings for US debt. S&P points to broad concerns on achieving political consensus along with the
fiscal consolidation plan falling short of the amount needed to stabilize the debt burden over the
long run. The US debt ceiling agreement called for expenditure cuts of US$2.4 tn to be decided in
two tranches of US$917 bn immediately and US$1.5 tn to be recommended in November 2011.
Questions were, however, raised on the S&P’s assumptions of the pace of discretionary spending
in fixing the trajectory for the debt. The S&P clarified that the assumptions were not material
enough considering that the debt projection was at US$14.5 tn (79% of CY2015E GDP) versus
US$14.7 tn (81% of CY2015E GDP) with the initial assumption. The material difference
amounting to US$2 tn could only be seen if the projections were extended to CY2021E.
‘Relative’ ratings will be a key issue; knee-jerk reactions will be the order of the day
Even though US debt rating is no longer the coveted AAA, we do not see debt markets elsewhere
as a ‘safe haven’. Compared to the US economy, we believe that the European economies are
facing a more serious situation as the inter-holding of debt between the Euro zone economies
raises serious contagion issues. The ECB in its recent policy meeting agreed to start off again with
the bond purchases but restricted itself to purchasing Portuguese and Irish bonds while the market
was expecting some support in the Spanish or Italian bonds. In our opinion, much of the ratings
downgrade could have already been priced in during the last few trading sessions. Despite this,
the near term is likely to see some knee-jerk reactions to this news with strong volatility likely as
investors come to terms with the new reality of a US rating downgrade. In the interim, gold could
be the only safe haven asset and could see some price rises. For the longer term, we believe that
investors could focus more on the US growth aspects. US growth, in turn, could see some
downward bias as fiscal austerity kicks in and there could now be serious limitations on any further
liquidity injection in the US markets.
Indian equities likely to maintain a downward momentum and depreciation likely in INR
Indian equity markets could also see turbulence in the near term. However, there could be some
silver linings as the US economy slows on account of fiscal austerity. Any significant slowdown in
the global economies could lead to a downward bias for the commodity prices, a factor that is
likely to be most beneficial for emerging markets like India. India’s growth also remains relatively
resilient (our estimates at 7.3% for FY2012E) and hence, it is unlikely to see significant outflows.
However, our policy call for the RBI to increase the repo rate by a further 25-50 bps could be put
to test in the event that commodity prices globally come down sharply and risk aversion is
significant.
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