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
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.
