AVIVA PLC Market commentary on Moody's downgrade of China's sovereign debt rating
(London, Zürich) Will Ballard Head of Emerging Markets and Asia Pacific Equities at Aviva Investors comments Moody's downgrade rating:
"Moody's downgrade of China's sovereign debt rating today should come as little surprise to investors, taking it to a rating that is now on par with Fitch. S&P will probably be next. For equity investors debt ratings have no direct read across. However, it could have knock on effects and start to turn the spotlight on whether there are more serious issues that need to be addressed and that could undermine investor confidence in not only debt, but also equity markets.
"The first stage impact is that once the sovereign rating is downgraded, it is likely that most Chinese banks will have to be downgraded as well. A rising cost of funding for the banks, unless it can be passed on, results in falling net interest margins. That in turn to the average equity investor, means lower earnings for banks stocks. Considering international investors are already having misgivings about investing in Chinese banks, with ICBC's H shares trading on only 6x earnings, any fall in earnings is going to do nothing to help confidence.
"The second factor worth considering is why are Moody's downgrading the debt? Should their analysis prove correct then perhaps we are looking at a slower path to growth for Chinese GDP. Should that be the case, then again, future earnings of Chinese companies could be lower than investors expect. Lower growth and lower earnings normally mean lower valuations.
"Is it all as bad as that? Well the first thing to say is that this downgrade isn't unexpected. In fact the Chinese are well aware of some of the concerns highlighted by Moody's. Xi Jinping has already called for increased action from the government to control financial risks and improve co-ordination between the various regulatory authorities. Valuations are also already low. The HSCEI, which represents Chinese companies listed in Hong Kong, is one of the cheapest equity indices. It trades on only 8.5x expected earnings, compared to the broader MSCI Emerging Markets index on 13x. With that in mind, perhaps it's no surprise that the index was only slightly down on this announcement."
ENDS
Press Contact Switzerland
Kirsten Duelli
Instinctif Partners
+41 44 280 11 88
kirsten.duelli@instinctif.com
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