A United States debt default is unlikely, market strategists have said.
However, the world’s largest economy risks losing its ‘AAA’ credit rating eventually, a notion which would fuel demand for Australian assets and gold.
Fund managers including BlackRock Australia, AMP Capital Investors and UBS Wealth Management (UBS WM) are expecting that US politicians will make a last minute comprise to raise the country’s debt ceiling and avert default ahead of the 2 August deadline.
“Our core view at UBS WM is that the US won’t default, but there is a risk it may lose its AAA Standard & Poor’s rating,” UBS WM head of investment strategy and consulting George Boubouras said.
BlackRock Australia head of fixed income Steve Miller said that any outcome from the US debt talks is likely to be “more cosmetic than substantial” and won’t prevent ratings agencies from downgrading the country’s credit rating.
He said key beneficiaries of a downgrade would include gold and the bonds and currencies of those countries that are rated ‘AAA’ and likely to keep it that way.
These include bonds and currencies of Australia, Canada, Switzerland and Scandinavian countries that do not use the euro.
AMP Capital Investors head of investment strategy and chief economist Shane Oliver said that if the US is downgraded, Australian bonds would rally and be seen as a safe haven.
“If America’s rating is downgraded Australian government bonds would be a key beneficiary of that along with the Australian dollar,” he said, adding that the Australia’s terms of trade means that the local dollar will likely rally to US$1.20.
Boubouras said the gridlock regarding an agreement on the US debt ceiling and budget negotiations is a clear concern for markets and would keep short term volatility elevated.
UBS WM has a tactical overweight to cash, international and domestic equities and gold versus strategic benchmarks.
“Equity valuations simply remain attractive versus long-run historical benchmarks. The quality dividend has been a good relative contributor year-to-date,” he said.
“Gold is a good traditional hedge for inflation, excess volatility and ideal as an alternative real store of wealth.”
UBS WM had tactical underweights on Australian real estate investment trusts and alternatives, he said.
Even if the US did lose its top credit rating from S&P, it would imply a split rating versus other rating agencies, he said.
