In the light of such views, LOIM says it will remain overweight countries with “strong macroeconomic fundamentals” – in many cases, emerging market countries.

Debt-laden countries such as the UK and Italy, which suffer from ageing populations, high public spending and sluggish economic growth, need to be fundamentally reassessed, while many emerging market countries should be seen far more positively than is currently the case, it said.  

“The discrepancy between credit ratings and macroeconomic fundamentals is now abnormally wide. Several developed economies are clearly overrated (the US, Spain, Italy and the UK) while there is considerable scope for further upgrades of emerging market economies (such as China, Russia, Taiwan, South Korea and Indonesia),” the firm said.

“We’ve looked at the relationship between macroeconomic data and credit ratings, deliberately ignoring the historic and subjective measures that have created the current anomalies,” said Richard Walsh, head of emerging markets at LOIM. “There’s terrific scope for some really sharp corrections, both up and down, as the agencies reflect the underlying data,” Walsh said.

The report went on to note that the average rating of developed markets (DMs) is several notches above that of emerging markets (EMs).

“Compared to Fitch and the other two main rating agencies, the best regarded EM-based agency, the Chinese Dagong, assigns almost systematically higher ratings to EMs and lower ratings to DMs. On 2 August 2011 Dagong downgraded the US sovereign to single A, five notches below the rating of the three Western-based rating agencies,” the report noted.