Fitch Downgrades US Credit Rating
This past week, Fitch Ratings downgraded the long-term rating of the United States from AAA to AA+. The agency cited a deteriorating fiscal position of the country, which is expected to weaken further over the next three years as debts continue to rise and debt ceiling adjustments remain complex.
Stock Market Reacts to Credit Rating Downgrade
Following the downgrade, the stock market reacted negatively, with the S&P downgrading from AA4 to A4+. It took about two months for the market to start recovering after the downgrade.
While most Asian stocks, including the latest US stock market futures, fell 0.3-0.7%, the impact was considered not very serious.
Thailand Fund Manager Predicts Short-Term Market Fluctuations
The manager of SCB Asset Management Co., Ltd in Thailand expects the market to fluctuate in the short term. There may be pressure to take profits from the Market Developed Stock market, which has seen significant improvement since the beginning of the year.
Moreover, the manager believes that the impact on the market this time is unlikely to be as serious as in 2011 when the US faced a similar downgrade. With the debt ceiling problem extended to January 2025, it is too early to worry about the financial situation of the United States at this time.
Strong Performance of US Stock Funds
US stock funds have remained strong since the beginning of the year. According to Morning Star Research (Thailand), the top 10 funds with the highest returns as of July 3, 2023, are as follows:
- MEGA 10 Mutual Retirement Fund (MEGA10RMF) – 44.32% return
- SCB Innovation Fund (SCCBINNO(SSFE)) – 42.90% return
- Krungsri Disruptive Innovation Fund-I (KFINNO-I) – 40.60% return
- TMB Eastspring Global Innovation Fund (TMB-ES-GINNO) – 39.15% return
- Thanachart Eastspring Global Innovation Fund (T-ES-GINNO-SS) – 38.60% return
- BCAP US ND 100 Equity Fund 100 (BCAP-USND10) – 36.98% return
- KKP NDQ100-HEDGED Fund Type F (KKP NDQ100-HF) – 36.64% return
- USNDQ Hedged Stock Tallies Fund (TLUSNDQ-HA) – 36.31% return
- K NDQ 100-A US Equity Index Fund (K-USXNDQ-A(A)) – 36.00% return
- SCB US Equity NDQ Open-Ended Fund (SCBNDQ(SSFE)) – 35.51% return
Bodin Putta-in, Director of the Investment Strategy Department, East Spring Asset Management (Thailand), suggests that historically, a 4% US 10-year Bond Yield often corresponds with a decline in the stock market.
In summary, the credit rating downgrade is not expected to have a significant impact on the stock market. Instead, attention will shift to economic numbers and the upcoming 2Q/2023 results. Investors are optimistic about US stocks, particularly in the growth and technology sectors.
Reputation Impact on the United States
Trawut Luangsomboon, CEO of Chitta Wealth Asset Management Co., Ltd, believes that the credit rating downgrade is not a new occurrence for the United States. In 2011, Standard & Poor’s downgraded the country’s credit rating to AA+ from AAA. However, since then, the Dow Jones Index has risen by almost 200%.
Despite the downgrade, the AA+ rating still places the US ahead of countries like New Zealand and Finland, and it remains higher than Hong Kong, one of Asia’s top financial centers. The rating may be adjusted back to AAA if the US manages its debt ceiling and fiscal policy more effectively.
In the short term, the United States may experience a reputational impact, leading investors to be cautious about investing in US-denominated assets. However, this impact will likely be temporary and reflect short-term panic selling.
According to Mr. Trawut, the general sentiment of the US market remains relatively strong. The average returns of the S&P500 annually from 2011 to 2022 showed positive gains, except for 2018 and 2022. When considering all dividends over the 12-year period, the average annual return is +12.8%.
Additionally, the market impact of the downgrade on Vanguard Total (VTI), a fund investing in various US stocks, was minimal. It experienced a decrease of only -1.42%, compared to the year-to-date gains of +17.90%.
US Fiscal Position and Outlook
Fitch predicts that the US fiscal deficit will increase to 6.3% of GDP in 2023, rising to 6.6% and 6.9% in 2024 and 2025, respectively, from the 3.7% deficit in 2022. Local governments expect an overall deficit of 0.6% of GDP this year, following a moderate surplus of 0.2% of GDP in 2022.
Fitch notes that while the government’s cut in non-essential, non-defense spending improved the medium-term fiscal outlook, it did not have a significant impact. The agency does not anticipate a stronger fiscal outlook for the US until the 2024 election.
Despite the downgrade, the United States retains several structural strengths as a high-income economy with a diverse range of industries. Additionally, the US dollar remains the world’s most important reserve currency, providing the country with high financial flexibility.
However, Fitch Rating expects the US economy to enter a small recession in late 2023 and early 2024 due to tightened credit conditions and potential further interest rate hikes by the Federal Reserve.
Overall, ESG considerations and political stability play a role in a country’s credit rating. While these indicators have a positive effect, concerns regarding the fiscal health of the United States have led to the downgrade from AAA to AA+.
We remain positive on US stocks, particularly in the growth and technology sectors, as the Federal Reserve nears the end of its rate hike cycle. Investors should consider this gradual decline in the stock market as an opportunity to invest.
This past week, after Fitch Ratings downgraded the long-term rating of the United States from AAA to AA+, it considered the fiscal position of the United States to be deteriorating. It is likely to weaken over the next three years as debts continue to rise and debt ceiling adjustments over the past 20 years remain complex.
With the S&P downgrading from AA4 to A4+, the stock market reacted negatively immediately. Before starting to recover after Downgrading, about 2 months
As for most Asian stocks, including the latest US stock market futures, it fell 0.3-0.7%, which is considered “not very serious”.
on the sidethe manager of the fundThailand estimates that the market may fluctuate in the short term. and there may be pressure to take profits from the Merket Developed Stock market, which has improved significantly since the start of the year.
the manager of the fund SCB Asset Management Co., Ltd. There is an opinion that The impact on the market is unlikely to be as serious as last year. 2011 because there is no clear trigger or event In terms of solving the debt ceiling problem, this round has been extended to January 2025, so it is estimated that it is too early for the market to worry about the financial situation of the United States on this of time
of course US stock fund since the beginning of this year remains strong through the monsoon that scares the market Morning Star Research (Thailand) data on “US stock fund returns” found that the top 10 funds that still giving the highest returns (on 3 July 2023) as follows:
1. MEGA 10 Mutual Retirement Fund (MEGA10RMF) returns 44.32%
2. SCB Innovation Fund (for savings through electronic channels) SCCBINNO(SSFE), return 42.90%
3. Return of Krungsri Disruptive Innovation Fund-I (KFINNO-I ) 40.60%
4. TMB Eastspring Global Innovation Fund (TMB-ES-GINNO) returns 39.15%
5. Thanachart Eastspring Global Innovation Fund Earnings for Savings ( T-ES-GINNO-SS ) 38.60%
6. BCAP US ND 100 Equity Fund 100 (BCAP-USND10) Return 36.98%
7. KKP NDQ100 – HEDGED Fund Type F (KKP NDQ100-HF) Return 36.64%
8. USNDQ Hedged Stock Tallies Fund (TLUSNDQ-HA) Yield 36.31%
9.K NDQ 100-A US Equity Index Fund, Accumulation Type (K-USXNDQ-A(A)) Yield 36.00%
10. SCB US Equity NDQ Open-Ended Fund (for savings through electronic channels) (SCBNDQ(SSFE)) 35.51%
“Bodin Putta-in”, Director of the Investment Strategy Department, East Spring Asset Management (Thailand), has an opinion that if you look at past movements, you will see that when the US 10-year Bond Yield reaches 4% . stock market is also often sold.
In summary, our view is that the credit rating downgrade will not have a significant impact on the stock market. And the market will return to paying attention to economic numbers. 2Q/2023 results, including tracking whether or not the Fed can make a soft landing.
We remain positive on US stocks, particularly the growth and technology sectors as the Fed reaches the end of its rate hike cycle. “Investors may use the time when the stock market is gradually declining to invest.”
“Trawut Luangsomboon” CEO of Chitta Wealth Asset Management Co, Ltd believes that this is not the first time that the rating agency has downgraded the credit rating of the United States.
by Standard & Poor’s, a leading US rating agency. The country’s credit rating was downgraded to AA+ from AAA in 2011 after the government was able to avoid default at the time.
At the time, the company attributed its downgrade to political risks, but since 2011, the Dow Jones Index has risen almost 200%.
Compared to the downgrade, the AA+ rating will put the US on a par with New Zealand or Finland, still higher than countries like Hong Kong, which get considered in the top 5 financial centers of Asia. If the US can manage the debt ceiling and fiscal policy more clearly, the rate may be adjusted back to AAA again.
“In the long term, it is not expected to have a serious impact on the economy. But we may also see a reputational impact on the United States. In the short term, investors may be wary of investing in US-denominated assets. but believe the impact will be small in line with the selling pressure from the short term panic only.”
Mr Trawut said the general sentiment of the US market remained relatively strong. If we look at the average returns of the S&P500 Annually from 2011 to 2022, which is a total of 12 years, with only 2018 and 2022 in the S&P500. have negative returns If the average return is calculated including all dividends for 12 years, the average annual return will be +12.8%.”
In addition, it can be seen that after the market learned about the news of the downgrade, the impact on the stock market Vanguard Total, or VTI, a fund that invests in various stocks in the United States. Down by only -1.42%, which is only a small percentage compared to the year-to-date gains which have increased to +17.90%
If there is a regular investment, DCA can usually be invested The downgrade event is a market situation that has happened and is only short term volatility.
Fitch predicts that the US fiscal deficit will increase to 6.3% of GDP in 2023, reaching 6.6% and 6.9% in 2024 and 6.9%, respectively, from 3.7% in 2025. 2022, and local governments expects an overall deficit of 0.6% of GDP this year after a moderate surplus of 0.2% of GDP in 2022.
The government’s cut in non-essential, non-defence spending, which accounts for 15% of total federal spending under the ‘Fiscal Responsibility Act’, only improved the medium-term fiscal outlook. None but little, said Fitch, who does not see a stronger outlook for the US fiscal until the 2024 election.
But the United States has retained many structural strengths. The content of the United States is a high-income economy. It is large and spread across a variety of industries. In addition to the status of the US dollar, it is still considered the world’s most important reserve currency. This gives the United States high financial flexibility.
However, Fitch Rating expects the US economy to enter a small recession in late 2023 and early 2024. The Federal Reserve has tightened credit conditions, with interest rates raised over the past year. And there may be one more rate hike this year, which could affect the strength of the US economy.
ESG considerations (It is a concept for sustainable corporate development, which stands for Environment, Social and Governance) as well as political stability, rights, and other governance indicators. It has a positive effect on the country’s credit rating. but overall The downgrade from AAA to AA+ reflects growing concerns about the fiscal health of the United States.
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