FUNDAMENTALS NEWSLETTER
Fundamentals is a Legal & General Investment Management monthly publication. It includes topical investment related articles together with our views on the major world economies and markets. The most recent editions of Fundamentals can be found below. For earlier editions, please email harriet.moore@lgim.co.uk
FEBRUARY 2010 EDITION 'CORPORATE BONDS: BEWARE THE TAIL-RISKS'
In 2009 corporate bonds delivered remarkable gains. With double-digit returns typically reserved for the likes of equities rather than (normally tranquil) bonds, credit markets have attracted a steady flow of investors. Following such a stellar performance, however, what can investors expect in 2010? In this month’s edition of Fundamentals, LGIM credit strategist Ben Bennett examines three broad risks facing credit markets in the year ahead and how investors may be able to navigate through them successfully.
DECEMBER/JANUARY 2009 EDITION 'WILL IT LAST?'
The global economy emerged from intensive care during 2009. A year ago financial markets were left reeling after enduring a systemic failure of the banking system and one of the sharpest, deepest recessions on record. Throughout the course of the year policy makers undertook extraordinary measures to rebuild confidence in the financial system and stimulate economic activity. As we head into 2010, economic data has begun to improve and financial markets have responded with enthusiasm. In this edition of Fundamentals, LGIM's economists and strategists discuss whether the recovery is sustainable and provide their forecasts for major investment markets in 2010.
NOVEMBER 2009 EDITION 'MIND THE GAP'
This time last year we flagged a cautious outlook for equities in our Fundamentals article 'Beware the Value Trap'. Despite seemingly attractive valuations, we felt significant risks remained to earnings and dividends as the credit crunch and global recession derailed the market. UK equities traded another 20% lower between November and March. In May's note 'Great Expectations', we described how equity markets were getting back on track and that more realistic earning expectations coupled with an improvement in macroeconomic and credit conditions could send prices higher. The FTSE 100 is now trading some 50% above its March lows, in a large part due to the extraordinary measures that policy makers have taken to inject liquidity into the financial system and stimulate economic activity. In this edition of Fundamentals, LGIM's Equity Strategist, Georgina Taylor, projects how equities will perform as markets start to question when this liquidity will be withdrawn, and the focus shifts to more traditional drivers of economic growth.
OCTOBER 2009 EDITION 'DEBT WISH'
For more than a decade cheap money (low interest rates) and easy access to loans have caused us to take on more and more debt in order to purchase everything from our home to our car to the latest appliances. From an economic perspective, debt represents borrowing for the future to facilitate spending today. Given how elevated the total level of debt in our economy is now, LGIM Economist James Carrick argues in this edition of Fundamentals that it is unreasonable to expect debt to continue to move higher. In fact, the positive factors - falling interest rates, demographics, credit availability and sub-prime lending - which enabled the massive build up debt, are starting to fade. This threatens to undermine the strength of the economic recovery in the developed world.
SEPTEMBER 2009 EDITION 'LIFE AFTER THE RECESSION'
Despite the severity of the global recession, we identified in March this year that pessimism had become too extreme. Back then, we felt companies had cut back production too far and expected a significant improvement in manufacturing activity. Consequently, we felt equity and credit markets would react positively as signs of economic activity re-emerged. This dynamic is now reaching maximum strength and market participants have begun to revise growth expectations higher. However, while conditions are improving, there is a danger that confidence in the recovery rises too quickly. While the stage is set for a global economic comeback, LGIM Economist, Tim Drayson, takes a close examination into the health of the recovery and whether a potential relapse could occur.
JULY/AUGUST 2009 EDITION 'SERENDIPITY FOR DC INVESTORS'
Investors would be forgiven for feeling somewhat sceptical when it comes to new pension legislation. In recent years most developments have not always delivered a clear benefit to workers, employers or pension providers. However, the introduction of Personal Accounts, planned for 2012, may unexpectedly ignite a series of unintended consequences which will ultimately be to the benefit of all involved in defined contribution (DC) schemes. In this issue of Fundamentals, Ian Richards, Legal & General Investment Management (LGIM) Head of DC Strategy discusses the implications of the "Personal Accounts Delivery Authority's" (PADA) investment consultation paper "Building Personal Accounts: designing an investment approach".
JUNE 2009 EDITION 'THE SHAREHOLDERS HAVE SPOKEN'
As the dust begins to settle on a financial system
shaken to its core, investors are rightly asking:
What could have been done to avoid the recent
banking crisis? Were the processes, policies and
laws governing corporations inadequate? Should
shareholders have been more involved?
In this issue of Fundamentals, Legal & General
Investment Management (LGIM) discuss the key
challenges facing the system, how they may be
addressed and what LGIM has been doing to build a
healthier corporate environment.
MAY 2009 EDITION 'GREAT EXPECTATIONS'
In September 2008 we outlined four key factors which
could support an equity market recovery. We
concluded then, that further economic weakness was
needed to contain inflation, and if that were
followed by aggressive policy easing and improved
bank lending conditions, equity markets could rally
mid-2009.
Since then, as the global economy has
continued to decline, governments and monetary
authorities have synchronised an aggressive policy
response and equities have rallied. Recent equity
strength, however, has split market commentators.
While some argue we are simply in the midst of a
bear-market rally, others believe we have now seen
the green shoots of an economic recovery which will
support a more sustained rise in equity markets. In
this edition of Fundamentals, LGIM’s Equity
Strategist, Georgina Taylor, explains what our
research suggests.
APRIL 2009 EDITION 'IS COMMERCIAL PROPERTY FIT FOR THE FUTURE?'
As the UK economy fell into recession last year, inflationary expectations dived and official interest rates were slashed. More recently, monetary authorities have resorted to more innovative tactics to try and kickstart growth. In a perfect world investors would benefit from an option which combines the relative security associated with bonds now, coupled with the growth potential of equities in a few years time. Commercial property has these attributes and investors can build portfolios which are defensive in the short-term but naturally convert over time to a position to benefit from growth explains Legal & General Property’s Head of Research, Robin Martin.
MARCH 2009 EDITION 'THE LONG ROAD BACK'
Last spring, our lead indicator began to flash ‘recession alert’ for the UK economy. Since then, we have remained far more pessimistic about the outlook for UK economic growth than other economists. But as the global backdrop has deteriorated, that gap has now closed. We now find ourselves slightly more optimistic than consensus about the prospects for the UK economy. Our lead indicator envisages a gradual recovery beginning later this year. Lower energy prices, falling mortgage rates and a slight easing in credit availability should boost growth as we head into 2010. While risks remain, particularly from a sharp rise in the household savings ratio or falling wages, our lead indicator suggests that early 2009 probably marked the most intense phase of the contraction, though recession is likely to linger for a few more months.
FEBRUARY 2009 EDITION 'OPPORTUNITY OF A LIFETIME?'
Corporate bonds were shunned last year as large, high profile companies collapsed and the global financial system went into meltdown. Indeed, the credit crisis was even named after the asset class. However, in January, institutional and retail investors have poured money back into credit markets, attracted by historically high yields in an environment of volatile equity markets and ultra-low deposit rates. In this edition of Fundamentals LGIM’s credit strategist, Ben Bennett, examines the market, explains the key risks ahead and identifies the stellar opportunities which credit markets currently offer long-term investors.
DECEMBER/JANUARY 2008 EDITION 'THE GOOD, THE BAD AND THE OUTLOOK FOR 2009'
2008 has been a year of extreme trading conditions and fundamental macroeconomic change. Investors have had to endure unprecedented market volatility, steep equity market declines and the worst credit market conditions in more than fifty years. Recently, though, we have seen the beginning of a rapid and robust policy response from governments and central banks across the globe. But how long will it take for these measures to have effect? As we go into 2009, is the worst behind us, or will next year be even more difficult? LGIM’s economists and investment strategists give their projections in the following edition of Fundamentals.
NOVEMBER 2008 EDITION 'BEWARE THE VALUE TRAP'
In our September issue of Fundamentals we identified four signals for a stock market recovery – cheap valuations, low inflation, loose monetary policy and economic growth. We have since seen further evidence of a global economic slowdown, inflation fears subside and a synchronised global easing of monetary policy aimed at stabilising the world economy. But what’s happened to equity valuations? In the following paper, we get inside the mind of LGIM’s equity strategist Georgina Taylor, and drill down into how attractive UK equities really are at current levels.
OCTOBER 2008 EDITION 'THE NEXT LOST DECADE?'
The US is currently facing what could be the worst financial crisis since the 1930’s. As bank failures spread and the economic backdrop deteriorates, fears that the US will mimic Japan’s period of anaemic growth and falling asset prices have intensified. In this edition of Fundamentals, Legal & General Investment Management (LGIM) Economist, Tim Drayson, examines the similarities and key differentiators between the two periods of decline, and critically evaluates what it means for the fate of the US economy.
September 2008 EDITION 'taking stock: the equity market recovery?'
Back in May, Legal & General Investment Management’s (LGIM) Investment Strategist, James Carrick, flagged the possibility of a UK recession. Last month we heard the Governor of the Bank of England (BOE) forecast ‘no growth’ for the next year. Yet, despite the economic doom and gloom, stock markets tend to be forward looking. Waiting for things to get better, therefore, may mean missing out on strong equity market returns. In this edition of Fundamentals, James Carrick identifies the four key factors which could support an equity market recovery – and when we are likely to see them fall into place.
JULY/AUGUST 2008 EDITION 'WHO KEEPS THE BOSS IN LINE?'
A CEO can make or break a business. It’s their job to take the reins of an organisation and steer it strategically into the future. But who ensures they are doing a good job in maximising returns for shareholders?
As the largest investor in the FTSE 100, Legal & General Investment Management (LGIM) has a vested interest – and indeed a responsibility – in the answer to this question. It is generally agreed that an unbiased and empowered individual who sits outside the business is best suited to performing this duty. In the article which follows, LGIM’s Head of Equities, Mark Burgess, discusses the role of the ’board chairman‘ and explains just how an independent non-executive chairman can help create value for shareholders.
JUNE 2008 EDITION 'CAN THE PENSIONS TIDE BE TURNED?'
Employer sponsored pension plans have been put under pressure as more and more safeguards to scheme member’s accumulated pension entitlements are introduced. These developments are creating major challenges for employers and threaten to reduce future pension entitlements for many employees. Unfortunately, many fear that the worst is still to come, with Personal Accounts being introduced in 2012.
Legal & General Investment Management’s Head of Defined Contribution (DC) Strategy, Ian Richards, highlights some important concerns facing the future of UK pension schemes and what they might mean for employees and employers.
MAY 2008 EDITION 'RECESSION ALERT'
Will
the UK economy slide into recession? Consensus and
the Bank of England expect below-trend growth in
2008 but a recovery in 2009. By contrast, our
recession predictor is suggesting concern. Indeed,
more indicators are signalling danger now than
before the 2001 economic downturn, despite a weaker
pound. The economy is borrowing more now than it was
then and lending standards appear to have been
tightened more aggressively. With high food and
energy prices crimping consumer spending and
limiting the Bank of England’s room for manoeuvre
while leading indicators deteriorate in the euro
area, investors should brace themselves for a
possible recession.
APRIL 2008 EDITION 'SEPARATING THE WHEAT FROM THE CHAFF'
It is often claimed that when the US sneezes, the
rest of the world catches a cold. But what if the US
is shivering because emerging economies like China
are buying all the fuel? The US might be less
important than many people think because a lot of
analysis focuses on the late 1990s when domestic
demand imploded in Asia and Russia. These days, a
low cost of capital is boosting domestic demand in
emerging economies, boosting commodity prices and
squeezing profits and real incomes in the US.
Eventually, inflation pressures should force
emerging economies to ‘de–peg’ their exchange rates,
leading to a similar underperformance of US and UK
assets that we saw 40–years ago following the
breakdown of the previous fixed–exchange rate
regime, Bretton Woods.
MARCH 2008 EDITION 'PROPERTY: BACK TO FUNDAMENTALS'
After
14 years of positive returns, the UK commercial
property market went into sharp reverse in the
second half of 2007. The speed of the market decline
in the fourth quarter was unprecedented, and has
moved real estate pricing rapidly closer to fair
value. In this article, Rob Martin, Head of Research
for Legal & General Property, considers the causes
of the recent correction, examines the role that
property plays in an investors’ portfolio, and looks
at whether we may now be approaching a turning point
for the sector.
FEBRUARY 2008 EDITION 'IMPOUNDED'
Many economic commentators are worried about the UK
economy and don’t see inflation as a constraint
against policy easing. But they might be ignoring
the recent collapse in the pound which has fallen
the fastest since 1992 on a trade-weighted basis.
Given the UK’s large current account deficit, it
arguably needs to fall more. Sterling weakness will
boost inflation directly through higher import
prices. It might also boost inflation indirectly
through stronger net exports. The Bank of England
might therefore want to restrain domestic demand by
keeping interest rates relatively high.
DECEMBER 2007/JANUARY 2008 EDITION 'INDIGESTION'
2007 was a volatile year. Expect more of the same in
2008. Consensus global growth forecasts for 2008
haven't changed all year as stronger emerging
economies are assumed to offset a weaker US economy.
But rather than heralding a global soft landing, we
think it signifies a potential inflationary bust.
Inflation forecasts are being revised up again to
accommodate yet another 'temporary' oil price shock.
History suggests it's unwise to ignore the political
repercussions of rising food and energy prices. So
regardless of what the Fed does, global policy
conditions will have to be tight until we see a
significant global slowdown. While equity markets
have cheapened, they're not yet priced for a
sustained period of sub-trend growth to combat
inflation pressures. So we remain cautious over the
next year, particularly on the highly indebted
Eastern Europe region.
NOVEMBER 2007 EDITION 'GRANDPA'S GOT A BRAND NEW BAG'
Ahead of the key Christmas trading period, many investors are worried about UK consumer spending given higher interest rates and a weaker housing market. They fear a re-run of 2004/05 when real spending grew at its weakest pace since 1992. In this month’s issue of Fundamentals, James Carrick, Investment Strategist at Legal & General Investment Management argues that spending might hold up better than feared. Alongside a weaker housing market, the 2004 slowdown was partly driven by a tightening of credit card lending standards following a relaxation of bankruptcy laws. But consumer spending hasn't been driven by mortgage equity withdrawal or credit card lending over the past year. Instead it appears to reflect older people running down their savings and could therefore prove more resilient. Consumer spending is vulnerable to higher food and energy prices, but this applies more to emerging markets – where the consensus is optimistic – than the UK.
OCTOBER 2007 EDITION 'RETURN TO SENDER'
According to reports, the Fed's decision to cut rates on 18 September has let the genie out of the bottle. The Fed is debasing the currency. We will now see rising inflation, a collapse in the dollar and a boom in the price of gold, they say. But, as Albert Einstein stated 'Theories should be as simple as possible, but no simpler'. And we suspect that the prevailing theory is just a bit too simple. So, in order to try and answer the question, 'Where are we going from here?' we thought the best starting point would be to ask the question, 'How did we get here in the first place?'
SEPTEMBER 2007 EDITION 'OVERFED'
Financial markets corrected over the summer, as we predicted in our July Fundamentals. In this issue, James Carrick, investment strategist at Legal and General, examines whether now is a better time to buy equities or if further weakness is likely. By outlining the four key drivers of market performance (profits, interest rates, valuations and sentiment), he argues that markets should remain volatile with only modest gains expected. In particular, a lack of spare capacity should still discourage central banks from cutting interest rates as much as markets hope and depress profits. So the post-Fed rally could fade.
JULY / AUGUST 2007 EDITION 'THRILLER'
Following the recent sell off in government bonds and renewed concerns about US sub-prime mortgage debt, can investors relax over the summer break or will they have sleepless nights worrying about their portfolios? In this issue of Fundamentals, James Carrick, Investment Strategist at LGIM, argues that the outlook for the global economy remains good. But we are in historically dangerous territory for markets. And with debt starting to rise faster than profits, we prefer equities over credit, large caps over small caps, resources over financials and growth stocks over high dividend payers.
JUNE 2007 EDITION 'GROOVY BABY?'
The 1980s and 1990s were the best times to invest in stocks and bonds, particularly US stocks and bonds, in a century. The reason was that growth was strong and inflation fell persistently over the period. But today is not the 1980s and 1990s. In this issue of Fundamentals, Julien Garran, LGIM's chief investment strategist, suggests that global conditions are much more like the 1950s and 1960s, a period that was groovy to begin with, but ended in inflation. Julien seeks to answer the most fundamental investment question of all, could we see inflation emerge again?
MAY 2007 EDITION 'GLOBAL WARMING'
The global economy is booming as interest rates are too low. Although policy tightened enough to slow the US housing market, policy remains too loose for emerging markets such as China and India. In this issue of Fundamentals, James Carrick, Investment Strategist at LGIM, argues that strong emerging market growth could force the European Central Bank and the Bank of England to raise interest rates more than people expect. This could have a negative effect on the Spanish and Irish housing markets, however the core European and UK economies should remain robust.
APRIL 2007 EDITION 'BRINGING THE YIN-YANG BALANCE TO BOARDROOMS - THE ROLE AND RESPONSIBILITIES OF SENIOR INDEPENDANT DIRECTORS'
The City is very familiar with the roles of Board Chairman, Chief Executive Officer and Finance Director. However, often overshadowed by these prominent roles is another voice in the boardroom which has grown increasingly more important to investors. This voice has been fighting the corner for minority shareholders in boardroom battles and has gained little recognition for their efforts. This voice comes from the 'Senior Independent Director'.
MARCH 2007 EDITION 'THE YIELD COMPRESSION CHAMBER'
Financial markets are mad for yield and it is not hard to see why. Many yield based assets from emerging market debt to global REITS have sharply outperformed their respective markets. In this issue of Fundamentals LGIM's strategists ask what has caused these trends, who has been buying and selling and what implications this has for future investment decisions.
FEBRUARY 2007 EDITION 'LOADSAMONEY'
It is widely believed that the rich are getting richer at the expense of the poor. Structural factors like globalisation are blamed. The wages of the many have been depressed while a few 'super rich' have benefited from increased profits. In this issue of Fundamentals, James Carrick argues that cyclical factors might also be at work. Tight labour markets, falling commodity prices and high interest rates should see income inequality narrow.
DECEMBER 2006/JANUARY 2007 EDITION 'CRISS-CROSS'
It's been a long strange trip for global asset markets in 2006. In this issue Julien Garran; LGIM's chief strategist, set out LGIM's forecasts for 2007, as well as highlighting some of the good, and some of the not so good calls we made for 2006.
NOVEMBER 2006 EDITION 'THE DOLLARS BALANCING ACT'
Making a case for further falls in the value of the dollar is fairly simple given the continued expansion of the US's current account deficit. However, there may be some good reasons to believe that the US's external finances may be about to improve. In this issue of Fundamentals, LGIM's Head of Asset Allocation, explains why LGIM has a sanguine view about the prospects for the world's most important currency.
OCTOBER 2006 EDITION 'GIZZA BETTER JOB'
The composition of the UK's labour market has gone through some dramatic changes recently. Immigration, particularly from Eastern Europe, has been one important component of this transformation. But changes to the age structure and the quality of UK workers' jobs are having an even greater impact. In this issue of Fundamentals LGIM's Head of Asset Allocation, argues that together with trends in the global economy, these changes are all positive for the UK's service sector.
April 2002 EDITION 'THE LONGER-TERM FUTURE FOR EQUITIES'
Many commentators are saying that future returns on equities may be much lower than those achieved in the past. Andrew Clare, Financial Economist, examines the issues and opines as to the longer-term return prospects for UK equities and other UK asset classes.
