Over the past few days, it has been possible to conclude that the world was coming to an end.
Stock market levels have fallen sharply over the past week and London has been the subject of days of rioting and looting.
It’s not all bad news on the investment front.
The FTSE 100 index of leading UK company shares has closed up 95.97 points (or +1.89%) today, at 5,164.92.
Andrew Wells, Global Chief Investment Officer (Fixed Income) at Fidelity International commented today:
“While there will be continued volatility, there is a growing sense that the ECB have introduced some core stability to European bond markets by purchasing the government bonds of Spain and Italy.”
He went on to add:
“The other supportive factor is that Standard & Poor’s has reaffirmed the AAA sovereign credit ratings of France and the UK in the wake of the US downgrade.”
On a valuation basis, equities continue to look very good value at these levels.
The trailing price-earnings ratio on the FTSE 100 in the UK and DAX index in Germany are now at less than half their 20 year averages.
In the US, it should have come as little surprise that Standard & Poor’s decided to cut the sovereign debt rating from AAA to AA last week.
Whilst in other countries such a rating cut would have resulted in investors dumping government bonds, the US situation is arguably very different.
Vassili Serebriakov, Currency Strategist at Wells Fargo, pointed out today that foreign buyers simply don’t have any “alternatives to the Treasury market in terms of depth and liquidity,”.
The US has over $14 trillion of bonds issued whilst the next biggest issuers of AAA-debt have less than $2 trillion. It is important not to underestimate the sheer size of the US economy and debt market.
Japan, Russia and the UK have all reaffirmed their confidence in the US debt market since the rating cut. Whilst it could be argued there is an element of self-preservation in their supportive comments, it does underline just how important the US has become on the world financial stage.
Too big to fail was a commonly used expression to describe global investment banks during the last financial crisis.
In terms of world economies and the financial system as a whole, the US is certainly too big to fail.
What we might now witness is a gentle repositioning of the US economy away from borrowing and budget deficits, potentially losing its place as the world economic leader in the process, but this process is likely to be slow and orderly.
It’s not the end of the world, despite what some market and social indicators might have you believe.
Photo credit: Flickr/Beverly & Pack
