US economy faces fiscal wake-up call after Fitch downgrade, experts weigh in
Prior to the Fitch downgrade, the Nifty was up by 9 percent, the S&P 500 by 19 percent, and the NASDAQ by a significant 37 percent. This suggests that the market is in a strong position before the downgrade, unlike the weak situation in 2011.
Fitch Ratings has recently downgraded the United States' long-term foreign-currency issuer default rating from AAA to AA+ due to anticipated fiscal deterioration over the next three years. The agency also cited concerns about erosion of governance and a growing general debt burden.
In comparison to a similar downgrade in 2011 by S&P, this current downgrade from Fitch has brought about a different market scenario. Back in 2011, the Nifty, S&P 500, and NASDAQ were already down before the event, experiencing negative changes of 13 percent, 4.6 percent, and 3.6 percent respectively. However, in 2023, the market situation is entirely distinct.
Prior to the Fitch downgrade, the Nifty was up by 9 percent, the S&P 500 by 19 percent, and the NASDAQ by a significant 37 percent. This suggests that the market is in a strong position before the downgrade, unlike the weak situation in 2011.
Market analysts observe that the reaction to news and events differs based on the prevailing market trend. In an uptrend, markets might look through negative news, while in a downtrend, bad news can exacerbate the sell-off.
Adrian Mowat, an Emerging Equity Markets Strategist, views the Fitch downgrade as an interesting wake-up call on the fiscal position of the United States. He points out that the strong US economy is currently supported by significant government spending growth, but this cannot be sustained indefinitely.
Mowat said, “I think this is an interesting wake up call on the fiscal position in the United States. Part of the reason that we have a strong US economy is that you have got strong government spending growth this year, some 3.2 percent in real terms, and so that that's supporting the economy. But you can't keep that going.”
Mowat suggests that the Fitch downgrade might prompt people to reevaluate the situation and consider the implications of transitioning to a more normal yield curve and long-term interest rates. However, he agrees with the sentiment that, in a relative comparison, the US economy stands out as the most robust among major economies.
On the other hand, Manish Singh, CIO of Crossbridge Capital LLP, believes that despite the downgrade, US assets, particularly US Treasuries, still remain attractive on a relative basis compared to other developed market bonds. He acknowledges the US economy as the most robust among major economies.
Singh said, “I think emerging market bonds definitely are more attractive than developed market bonds, for the reasons that Fitch and everyone has outlined given the fiscal position, which could get worse. But that's the only thing I can draw from this. But it is not something which makes me think you shouldn't hold US asset or dollar asset or US Treasuries on a relative basis in the developed market world, US is definitely a far better economy in every way than any other economy in the Western world.”
First Published: Aug 2, 2023 4:50 PM IST
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