Fitch downgrades US' rating: How soon can the markets recover?

Global equity markets continued to feel the heat of Fitch Ratings’ downgrade of long-term foreign currency issuer default rating for the US to AA+ from AAA for the second consecutive day.

Most Asian markets, such as in Hong Kong, Shanghai and Japan lost up to 1 per cent in trade on Thursday. Back home, the S&P BSE Sensex and the Nifty50 also traded weak with a cut of around 0.3 per cent in intra-day deals.

Morgan Stanley’s upgrade of India to ‘overweight’, however, helped stem the fall.

“We upgrade India to overweight for secular leadership. We see a secular trend towards sustained superior USD EPS growth versus Emerging Markets over the cycle with a young demographic profile supporting equity inflows,” Morgan Stanley said in a note.

That said, how long will the global equity markets, especially the US and India, take to recover from the Fitch Ratings’ downgrade, or will it be a one-way street downhill as economic pressures mount? And, will the intermittent rise, if any, be met with selling pressure?

Stock markets, analysts suggest, are impacted by unexpected events and see a knee-jerk reaction. When market valuations are high, the sell-off, they say, will be sharp.

“The important question is whether this will impact the fundamental factors driving the rally in global markets. The answer is no. The US economy’s soft landing narrative, which is driving the ongoing global rally, is intact and getting stronger. Gross domestic product (GDP) growth in the US is strong and inflation is coming down. 80 per cent of US companies have posted better-than-expected quarterly results. The Fitch downgrade doesn’t alter this macro construct. The sentimental impact of the rating downgrade is likely to fade away soon,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Meanwhile, the last time the US saw a downgrade from a major rating agency was over a decade ago in 2011, when Standard & Poor’s (S&P) cut the rating to AA+ from AAA.

These two markets, back then, took over a month to get back to their feet, data shows. In the one month after the downgrade, the S&P 500, Dow Jones Industrial Average (DJIA) and the tech-heavy NASDAQ lost 2.8 per cent, 2.7 per cent and 2.3 per cent respectively, exchange data shows.

Back home, the S&P BSE Sensex and the Nifty50 lost 3.4 per cent and 3.7 per cent, respectively during this period. The Nifty Bank index, however, took a knock of 7.2 per cent during this period.

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The Fitch downgrade of US’ ratings, according to Nischal Maheshwari, chief executive officer for institutional equities at Centrum Broking, is more symbolic in nature, and most of the reasons cited by Fitch Ratings are already in public domain.

“The fall in global equity markets, especially in the US and India, comes after a good run in the last two-three months. The development has merely triggered a round of profit booking. The markets (Sensex) can fall another 200-300 points from here on out and reverse course. Most growth parameters in the US are good. If the upcoming economic releases are good, the markets will make a U-turn and start to move north,” he said.