The credit rating agency Moody’s, downgraded the UK economy from AAA to AA1 late last week (22nd February).

The downgrade of the UK economy had been rumoured for some time now, as most of the major rating agencies had since late 2012 placed the UK’s triple-A rating on ‘negative watch’. The fact that the current fiscal measures and varied austerity plans have so far been unable to restore economic growth within the UK, meant the loss of our AAA rating had long become inevitable.

The reasons for the downgrade of the UK economy – persistently low growth and the reduced ability to deal with any future economic shocks, such as another financial crisis or recession, have however largely been priced into the Markets.

Although it is hard to predict exactly what the downgrade’s impact will be – it is generally expected to be restrained. The main effect is likely to be a renewed pressure against the pound (already down 5% on a trade-weighted basis this year). This in turn raises the price of imported goods, and makes overseas travel that much more expensive. However as with any negative, a weakened currency also helps boost the UK’s international competitiveness in terms of our export led-sectors.

So although the downgrade makes for big headlines, good copy and sparks the inevitable political sparring – the main impact will be less about the Markets and more about placing greater political pressure on the Chancellor and Government to restore sustainable growth and get us back on track.

How does the downgrade of the UK economy affect my portfolio?

Most individual investors make their money over time, not overnight. While strategies may differ based on personal needs, the successful investors we’ve known seem to follow the same set of guidelines. At Bridge Investments the key four guidelines are to develop an investment strategy, stick to quality, diversify and invest for the long term. We will actively continue to monitor the Markets and if we feel there should be changes made to your portfolio as a result of this, we will certainly be in touch.

Angus Kirk

Financial Planner at Bridge Investments
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