Nifty, Sensex tank, Asian markets crash after Fitch cuts US credit rating from AAA to AA+

Nifty, Sensex tank, Asian markets crash after Fitch cuts US credit rating from AAA to AA+

Indian equities tanked almost 1%, while Asia-Pacific stocks faced a bloodbath, as global markets reeled from the impact of Fitch Ratings cutting the United States’ credit rating from the top-rated AAA to AA+. NSE Nifty 50 and Sensex traded 0.6% lower, while major Asian indices such as South Korea’s KOSPI, Japan’s Nikkei 225 and Hong Kong’s Hang Seng crashed over 1.5% each. The sovereign rating was stripped from the US on account of its increasing deficits and slow disintegration of governance, which impeded the government’s abilities to repay its dues.Fitch’s downgrade of US credit rating

The downgrade came two months after the incumbent administration and the Republicans agreed to suspend the government’s debt ceiling in a deal that came down to the wire. Fitch said the tax cuts and spending initiatives, as well as numerous other economic shocks, led to the budget deficits ballooning, and rising entitlement costs are yet to be addressed. Back in the year 2011, S&P Global Ratings’ in 2011, downgraded the US. Today, Moody’s Investors Service is the only major credit agency that retains the United States’ AAA rating.

The impact on the Indian markets will be short-lived as the market pivots to focus on other factors such as quarterly earnings, crude prices and the upcoming RBI policy. However, global markets have been heated and investors may look for reasons to correct it, said Mukesh Kochar, National Head-Wealth, AUM Capital.

An exception to the unanimous agreement, Deepak Jasani, Head of Retail Research, HDFC Securities, believes that the downgrade can have a significant impact on global risk appetite. In 2011, when S&P downgraded US ratings, Dow Jones fell by a high single digit percent and Indian markets, following America’s cues, fell by a larger proportion, taking longer to recover as well. “Though the current situation is vastly different from that in 2011, directionally we expect a similar behavior in the global markets though the quantum of fall may be different. Negative global risk appetite changes result in withdrawal of funds from most markets,” he added.

FII impact

The cut is unlikely to affect FII inflows, said Nitin Agrawal, CEO, Torus Oro PMS. While emerging markets could see a short-term fall as investors take flight to safer assets, the impact will be much lower. Manish Chowdhury, Head of Research, StoxBox added that it would be premature to arrive at a decision on FII flows, as various factors, such as the political, economic and monetary policy landscape, valuations, the structural market strength and growth opportunities, are considered in conflation.

What should those investing in foreign markets do?

Indian investors investing abroad should focus on tracking underlying economic factors, like US fiscal debt, inflation and whether the US economy is able to sustain the growth without taking this downgrade from Fitch into consideration, said Nitin Agrawal.