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Stable outlook for sovereigns

November 2017

The outlook for sovereign creditworthiness in 2018 is generally stable, according to credit ratings agency Moody’s, underpinned by expectations that the “healthy” and “synchronised” global economic growth of 2017 is likely to continue into 2018. Although high levels of debt and ongoing geopolitical tensions continue to pose a threat to growth and investor sentiment, this is likely to be mitigated by solid momentum in economic expansion.

  • Demand for fixed income funds remained strong amongst retail investors
  • Emerging market corporate ratings will take time to turn around
  • BoJ called for Asia to develop efficient, liquid local currency bond markets

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The outlook for sovereign creditworthiness in 2018 is generally stable, according to credit ratings agency Moody’s, underpinned by expectations that the “healthy” and “synchronised” global economic growth of 2017 is likely to continue into 2018. Although high levels of debt and ongoing geopolitical tensions continue to pose a threat to growth and investor sentiment, this is likely to be mitigated by solid momentum in economic expansion. Looking ahead to 2018, 74% of sovereigns have a “stable” outlook and 10% have a “positive outlook”; in comparison, only 16% have a “negative” outlook compared with 26% at the end of last year, indicating that fewer downgrades in sovereign ratings are expected in 2018 than in 2017. 

 “High levels of debt and ongoing geopolitical tensions continue to pose a threat to growth”

Fixed income was the best-selling asset class for a fifth consecutive month during October, according to the Investment Association (IA). Sales of fixed income funds continued to gather pace during the month; in contrast, retail investors’ interest in equity funds continued to lose momentum. The only fixed income sector to experience net retail outflows during October was £ High Yield; meanwhile, £ Strategic Bond proved to be the best-selling IA sector for a third straight month. Elsewhere, investors’ appetite for funds in the Global Bonds and Global Emerging Markets Bond sectors continued to strengthen. 

Nevertheless, ratings amongst emerging market corporates are likely to “take time to turn around”, according to credit ratings agency Fitch, despite an estimated 10% rise in revenues during 2017 and a largely improving global backdrop. The delay has been exacerbated by the downturn in commodity prices and by Brazil’s two-year recession from which the country has only recently emerged. During the first 11 months of the year, Fitch found that ratings downgrades amongst emerging market corporates exceeded upgrades by 60 to 45. Nevertheless, looking ahead to 2018, strengthening global demand is expected to support export activity in emerging markets, and economic growth amongst emerging markets is forecast to reach its highest level for four years. 

At the Asia Securities Forum, Governor of the Bank of Japan Haruhiko Kuroda called for Asia to develop “highly efficient and liquid local currency bond markets” in order to diversify sources of funding for the region’s companies. During a speech at the Forum, Governor Kuroda highlighted the “abundant savings” that could be recycled within the region if these enhanced investment opportunities are implemented.


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