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U.K. Government Debt Downgrade: Would it Matter to Investors?

By SEI’s Investment Management Unit

In recent weeks, major credit rating agencies (which rate bonds based on the ability of the issuer to repay the debt) have expressed renewed concern over the financial outlook for the U.K. and the creditworthiness of its government debt. The possibility that it could eventually lose its AAA rating has even been suggested. This raises the question: “What are the implications for investors?”

Furthermore, the managers in SEI’s fixed income funds generally hold negative views of the U.K. economy, based on the fact that the country’s longstanding competitive advantage in financial services has narrowed with the ascent of newer foreign financial centres, especially in Asia.

The portfolio managers and analysts at SEI believe the implications of a downgrade (should it occur) are negligible and remain firmly of the opinion that U.K. government debt remains a relevant investment. This perspective is based on analysis of the health of developed economies and relative security valuation as well as recent market behaviour. We also believe it is important to bear in mind that the downbeat outlook on the U.K. is due, in large part, to the austerity budget.

From an economic health perspective, apart from Germany and a handful of northern European countries, most sovereign debtors in the developed world are in a similar situation to the U.K. The debt of countries on the most solid financial footing (such as Germany) and of countries that have autonomy over their financial and monetary policy (such as the U.K., Japan and the U.S.) is, in our view, richly or at least fairly priced. In contrast, the debt of peripheral European countries (those with the smallest economies), which have limited financial and no monetary discretion, due to being part of the eurozone, is decidedly risky, a fact that current market prices reflect.

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