Washington's budget woes have finally come to a head, when Standard & Poor's cut the United States sovereign debt rating down one notch to AA+. While the downgrade has telegraphed for the past few months, as the various debt ceiling and budget commissions have butted heads, the news still came as a shock to investors. With the U.S. leaving the exclusive club, only 15 countries now have perfect credit ratings. Although President Obama has stated that nation is and will always be triple A, the long-term effects of the downgrade remains to be seen. For investors, taking a look at some of the other AAA options may make sense.
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Breaking the 94-Year Streak
The United States has held an AAA credit score ever since 1917, when Moody's (NYSE:MCO) first gave the nation a rating. S&P's analysis estimated that United States' debt would expand to encompass nearly 79% of the entire U.S. economy by 2015, and 85% by 2021. Based on these projections, the debt-to-GDP ratio is consistent with other AA+ rated countries. For example, the debt of AA+ rated Belgium is expected to grow to 85% of GDP by 2015. The long-term implications of the downgrade could be dire.
With its bonds being held in such high regard by investors, the greenback has become the world's number one reserve currency - but that could change. The rest of the globe is already raising questions about whether the financial system would be better off with an alternative world reserve currency. Recently, both China and the International Monetary Fund have contended that special drawing rights (SDRs) could help stabilize the currency system. The IMF is also prepared to issue government bonds denominated in SDRs, allowing many central banks to bypass U.S. Treasuries.
Finally, a AAA rating enables nations to borrow funds at a low cost, due to the fact their governments are considered stable and their bonds safe. This is similar to a consumer's credit score; the higher the score, the lower the interest rate. The U.S. may find it difficult to fund its future liabilities, as it may be forced to pay more on its bonds.
Betting On AAA
While some of the remaining members of the AAA club, such as France (NYSE:EWQ), could be considered in equally as unpleasant financial shape as the U.S., many others offer growing economies and great long term trends. For investors, adding exposure to these nations may make sense as great developed market plays. Here's how to play them:
When people look for economic powerhouses, Scandinavia doesn't usually come to mind. However, the nations of Sweden, Norway, Finland and Denmark are just that. On top of that, all four are members of the AAA club. Scandinavia's stronger export-driven economies have resulted in stable tax and fiscal policies. The Global X FTSE Nordic Region ETF (NYSE:GXF) tracks 30 different stocks, such as Novo Nordisk (NYSE:NVO) and Nokia (NYSE:NOK), and can be used as proxy for the region. Sweden is responsible for the bulk of the territories' growth, and can be played via the iShares MSCI Sweden (NYSE:EWD).
With the long-term trend of emerging markets needing more natural resources to continue their expansion, commodity rich nations will ultimately benefit. Both Canada and Australia make the AAA cut, and will see their long term fortunes rise along with commodity prices. The iShares MSCI Canada Index (NYSE:EWC) and iShares MSCI Australia Index (NYSE:EWA) are still the easiest ways to add the nations to a portfolio.
Finally, Switzerland remains the gold standard when it comes to safety. The nation's hallmarks include a strong currency, low foreign debt and an abundance of gold reserves. Global exporting powerhouses such as ABB Limited (NYSE:ABB) call the nation home, and nearly 40% of Switzerland's GDP is attributed to global exports. The iShares MSCI Switzerland Index (NYSE:EWL) can be used as play on the nation's equity markets, while the CurrencyShares Swiss Franc Trust (NYSE:FXF) can be used as way to access the nations strong safe-haven currency.
The Bottom Line
With the recent debt downgrade, the AAA club has now shrunk to only 15 nations. While the U.S. still remains number one in the minds of many investors, it pays to look at some of the other options out there. The previous examples are just some of the ways investors can broaden their horizons and stay AAA rated. (For additional reading, take a look at The Debt Ratings Debate.)
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