Snehal Manjreka: US Rating Downgrade

US Rating Downgrade

Snehal Manjreka
8/7/ 11

It is true that the political dogfight hastened the downgrade to a large extent, but I personally believe that the key holders of US debt and US currency pay little attention for such developments. Post financial crisis *astute* and *serious* investors have paid much little attention to credit ratings and their ratings actions. The market now seem to be ahead of the rating curve by getting more independent and intelligent.

I believe the recent panick-stricken selling of US equities is an overreaction from a bunch of bamboozled investors. The primary reason for the sell-off is possibly the diluting size of US corporate profits. As of Friday, the consensus forecast was that the S.& P. 500’s earnings would grow 15.8 percent in the third quarter. That’s off slightly from predictions of 16.7 percent third-quarter growth at the end of June, Mr. Butters said, senior earnings analyst at FactSet. On the other hand, Jeffrey N. Kleintop, chief market strategist at LPL Financial, says he thinks that “the estimates are still too high.” While profits might still grow by double digits, he said, they won’t be the 16 or 17 percent gains built into many analysts’ estimates. I believe this slight slowdown in US corporate profits reflects a conducive trend of squuezed margins due to increased hiring. I believe many manufacturing companies are returning back to the US and hence a subsequent rise in hiring will have a modicum downward impact on profits.

Talking about the S&P rating action as I mentioned above the key stakeholders of US denominated assets (Asian, Middle East nations, UK and Russia) are unfazed by the rating downgrade. Mentioned below are the comments of leading US denominated asset holders as sourced from Bloomberg:

Russia said the one-step cut “can be ignored.” Russia considers U.S. debt reliable and won’t review its policy of investing in the country, Deputy Finance Minister Sergei Storchak said by phone yesterday. The downgrade “can be ignored” for long-term investment strategy, he said. Russia is one of the 10 largest foreign holders of U.S. government debt.

Jordan has “faith” that the dollar and dollar debt “will continue to be the prime benchmark for risk-free debt,” Central Bank Governor Faris Sharaf said yesterday by telephone in Amman. “We are willing to accept U.S. risk even with S&P’s action,” he said.

Lebanese central bank Governor Riad Salameh said “the dollar is a shelter in times of crisis, and we have no plans to cut our dollar holdings.”

Japan, the second-largest international investor in American government debt, sees no problem with trust in the securities, a Japanese government official said on condition of anonymity.

In the U.K., the world’s third-largest foreign holder of U.S. debt, Business Secretary Vince Cable said yesterday the dollar is “the key international currency” in the short run.

South Korea on the other hand has scheduled an emergency meeting to mull over the matter. I have been hearing that the Bank of Korea is buying lot of gold in the market. Probably, to emgineer a slight decoupling from the dollar. But the size of the purchase wasn't big enough to talk about a real decoupling from the dollar as such.

Post this rating downgrade we might see demand for gold rising as central bankers might start shopping for gold in international bullion markets. Global fund managers have been bearish on US denominated assets since quite sometime now. They rather place more faith in US corporate debt than ramping up sovereign bonds holdings. Hence, a slew of negative comments from them should be ignored. I believe the most efficient investors presently existing in financial markets are central bankers. If they are reinstating their faith and trust in US denominated assets then the markets need not indulge in the unwarranted and value-destroying game of panick-selling of financial assets. Watch out for Central bankers and the SWFs for guidance!

About this author: Snehal Manjreka is a Business Decision Support Officer at CSC and former Senior Analyst at Thomson Reuters. This well-informed financial professional wishes to expand into the area of financial writing. As a guest writer and friend, I'd like to invite you to learn more about this promising young man by viewing his LinkedIn profile.