G-20 Countries Debt Fears Resurface: Should Investors Worry about another US Downgrade?

Ratings agency S&P once again issues warnings on sovereign creditworthiness of many G-20 nations including US, which was deprived of its AAA rating last August. According to S&P, US along with many other G-20 nations will face immense fiscal drags due to rising healthcare costs.

It’s likely that governments of many key economies will find it difficult to manage fiscal burdens and as a result we will witness massive drop in public financing.

Is it Time to Exit Stocks?

I don’t think that the latest warnings from S&P will have a major impact on global stock markets as these warnings do not point towards anything critical in the near future. Rather, it’s a known reality that with aging population healthcare costs are subject to head higher in most of the developed economies.

So, S&P’s prediction that average healthcare costs among developed nations will get as high as 11 percent of GDP by 2050 from 6.3 percent for 2010 should not surprise anyone. Aging population is not a new concern, but a long term challenge that is building up pressure on governments to increase spending on areas that do not hold prospects for high economic growth.

Recent US downgrade by S&P came as a shocker to investors but markets rose higher after quickly digesting the bad news and on a reassurance from president Obama. So, even if we witness another downgrade the impact could be limited, but for now investors need not get scared as any such downgrade may not be announced in 2012 or even 2013.

Even if global growth falters and worries of worsening debt situation resurface in 2012, another US downgrade won’t change the liquidity situation for US. We should not ignore that US dollar is considered as a safe haven and should remain so as it is the reserve currency. So, in troubled times we should see money flowing to US.

However, aging population and fiscal situation cannot be ignored, but in the short run investors ought to stick their neck out and take exposure in equities, as there aren’t many options where they can mint reasonable returns.

Conclusion

Globally, stocks have gained significant ground at the start of 2012 and there is ample money still waiting on the sidelines. So, any panic selling reaction on news flow from Europe or domestic debt issues in US will get buying support from those who feel left out. What we really need to focus on right now is growth, unemployment situation and consumer spending. The recent rally in stocks was sharp and built on skepticism, but the momentum is strong and its possible that markets continue to shrug-off bad news for most of 2012.

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