Market Round-Up

The S&P 500 index saw its largest daily decline since April at the start of August, triggered by a credit rating downgrade of US Government debt by the rating agency Fitch, which provides an assessment of creditworthiness. Fitch justified its decision to downgrade the US’s long-term debt rating from the highest ranked AAA rating to AA+, citing an “erosion of governance” over the past two decades.

While many might be surprised by the announcement - the concerns expressed by Fitch are not out of the blue. In May 2023, during the heart of the US debt ceiling standoff, the rating agency made its concerns very clear by announcing that the nation’s top-tier rating could be downgraded as the political standoff around how to keep the federal government from running out of money continued. As expected, the US Treasury Secretary Janet Yellen and the White House both disagreed with the downgrade, with Yellen calling it: "arbitrary and based on outdated data.”

Considering that equity markets fell materially on the back of the news, bond markets barely flinched. This is typically not the case, if a company or government experiences a fall in its credit rating, the cost of its debt increases as investors require higher returns given the greater default risks involved. However, markets didn’t react in a way that would suggest concern as the short end of the US Government yield curve, the most volatile part influenced by short-term changes, shifted upwards by a subtle 0.1%. This may suggest that the perceived risk of US Government debt may remain unchanged as investors still view US treasuries as low risk investments. One area that will be interesting to watch for any material change will be investor appetite for new treasury bonds, with roughly US$850bn of new supply to come into the market in the fourth quarter of the year.

Since 2012, UK universities have seen a continued uptick in the number of students enrolling on degree level courses. This looks good for the longer-term skill set of the UK workforce. However, students in towns and cities throughout Great Britain are now grappling with housing shortages and rent increases as the gap between supply and demand in the student property market widens. According to the real estate adviser CBRE, more than 350,000 purpose-built student beds across the UK’s 30 largest university towns and cities are needed to meet the expected demand for accommodation, putting a further squeeze on the UK’s already tight housing market. Record demand from students has put a great deal of pricing power in the hands of landlords and rental companies as they push rents higher to cover rising financing costs and capitalise on potential longer-term trends.

This is apparent within many of the UK-listed student property companies reporting strong revenue and profit growth as they push rates higher. While this could be positive for landlords, concerns have been raised around the longer-term affordability of these rents for students. Going forward, it will be interesting to see how the market imbalance changes within the sector, especially given the high spending and infrastructure costs required to increase the supply of housing for students.

Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.