A mid-cap industrial group listed on Bursa received a credit rating downgrade last week. One notch. Stable outlook. The standard rating agency language about deteriorating coverage ratios and softening end-market demand.
The price reaction was muted. The stock dropped 2.1% on the day of the announcement, recovered most of it within forty-eight hours, and is now trading roughly where it was before the news.
There are two ways to read a muted reaction to a credit downgrade. One reading is that the market had already priced the deterioration and the rating agency was catching up. The other reading is that the market has not yet priced the deterioration and is choosing to look through the rating action.
We think it is the second. The same company's bond spreads have widened modestly but not dramatically. The implied probability of default in the bond market remains low. Either the bond market is right and the rating agency is being cautious, or the bond market is wrong and the rating agency is signalling something the equity market has not absorbed.
Historically, when bond markets and rating agencies disagree, the rating agency is more often right on direction and the bond market is more often right on speed. The downgrade signal is real. The timing of when it bites the share price is less certain. The bite usually comes through earnings, two to four quarters later. Worth setting a calendar reminder.
