Portfolio Update – August 2020 – How downgraded credit ratings may impact your portfolio
- Monthly portfolio update: Fairly stable month: bonds down on Fed policy shift, but offset by K-shaped recovery in stocks and commodities
- Book tip: The Everything Bubble: The Endgame For Central Bank Policy by Graham Summers (link at the bottom of the post)
- In case you missed it: I have ditched all intermediate-term bonds (post from 3 August 2020)
- Coming soon: a post on real estate investing and how it fits in the All Seasons Portfolio. Stay tuned, and subscribe to newsletter for notifications!
I hope you have had a great summer under the circumstances, and are ready for the next (non-economical) season!
When posting this article, I have just come home to Sweden after a few weeks of visiting my girlfriend's family in Italy. For sure, the virus has put a great strain on the country, but it is good to see that things are moving in the right direction with society opening up. With few exceptions, new cases have been declining in Italy and Europe, which has bolstered investors with renewed confidence the past months.
Our vacation this year was not as we had initially planned (beaches in Sicily), but of a less touristy, and much more responsible, sort. Instead, we have stayed with her family and taken a few day trips to selected non-crowded destination (Venice has not been this empty for centuries). While more and more flights are opening up across Europe, it is still important to be cautious and not take unnecessary risks. One should not think that the danger is over, just because travelling is again somewhat possible. We can just hope for a full recovery as soon as possible.
But this is not a travel blog, but a financial blog, even though I wish to one day be able to sustain a life abroad thanks to my finances.
In this light, I have lately been thinking about how Covid-19 has affected the financial stability of countries, and how that in turn will impact sovereign credit ratings. For example, if debt-to-GDP would increase too much, if the affordability of the debt would fall, or if the economic outlook or stability of a nation would decrease, it will impact the country's ability to service its debt.
The ability to service debt - or a sovereign state's credit worthiness - is what the credit rating agencies Fitch, Moody's and Standard & Poor, are all analysing and rating. If a sovereign state has a good credit rating (AAA, Aaa etc.), this gives great comfort to the investors who purchase the country's bonds that there is a low risk of that the state defaults on its debt.