Is it time to rethink the US market exposure in your portfolio?

Investing in this market is essential for geographical diversification, exposure to tech leaders

- SANJAY KUMAR SINGH & KARTHIK JEROME

Moody's Investors Service downgraded the United States (US) government's credit rating from AAA to AA1 on May 16, 2025. This has sparked concern among Indian retail investors who have diversified globally, with many questioning whether to maintain, reduce, or exit their US fund holdings.

Why the downgrade happened The downgrade stems from the US's widening fiscal deficit and elevated debt-to-GDP ratio. "The high level of debt-to-GDP ratio could make it difficult for the US to service its debt," says Pratik Oswal, chief of passive business, Motilal Oswal Asset Management Company (AMC).

Moody's was the last of the three major rating agencies to lower the US's rating, following the S&P (2011) and Fitch (2023).

Fixed income market impacted The fixed-income market reacted to the downgrade, with the 30-year Treasury yield rising above 5 per cent as investors demanded higher returns for perceived risk.

Longer-term risks include rising borrowing costs and inflation. "If the cost of borrowing for the government goes up, then typically the cost for companies also rises," says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors. Higher borrowing cost could affect earnings and also cause inflation to move up.

The reaction in the equity markets has been muted. "The US market has large corporates, which are well entrenched and derive their revenue not just from the US market but globally," says Kaustubh Belapurkar, director-manager research, Morningstar Investment Research India.