Legal and general investment major bets on UK recession

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Britain’s biggest asset manager is buying bonds and selling equities to prepare for a “significant” economic downturn, warning the Bank of England will be forced to slide the economy into recession despite signs inflation is easing.

Sonja Laud, chief investment officer at Legal & General Investment Management, which manages £1.3 trillion in assets, said a slowdown in inflation this week is not a sign Britain will escape recession, while the labor market remains tight and the impact of higher borrowing costs has not yet abated.

In an interview with the Financial Times, he said, “It is a great relief that inflation in the UK is lower than expected, but if you look at the actual numbers it is still very high and we should not forget that.” “We have no doubt that raising interest rates will slow the economy because otherwise inflation will not be low enough for central banks to get their footing in.”

Laud is framing the UK recession as part of a wider global recession, including in the US, where a sharp drop in inflation has prompted widespread predictions of a “soft landing” for the economy. However, he noted that the UK housing market, where BoE rate hikes hit mortgage borrowers sharply, is particularly sensitive to higher interest rates.

While UK government debt and stocks both suffer in a rising rate environment, Laud expects fixed income to benefit from a renewed appetite for safety.

“Whenever inflationary concerns dominate the narrative you have a positive bond equity correlation, but when growth dominates you have a negative correlation,” he said. “Our expectation in a recession is that bonds will do as well as they always have.”

Noting the dramatic revaluation of UK debt in recent months, Laud said he “loves gilts” and that the company has been buying recently, but cautioned that their appeal is more limited to investors who are more interested in UK debt. I am not

“The attractiveness of gilts depends on whether you want to hedge the currency or not,” he added. “It’s not going to be as interesting if you’re not in the UK and you have to consider currency.”

While gilts have led the rise in the bond market this week, sterling has fallen 1.7 percent against the dollar from its high on Tuesday.

Laud’s comments reflect a broader trend of domestic investors turning to gilts to seek higher yields, while large international investors have been more cautious over fears of the country’s looming inflation problem and an uncertain policy outlook.

Figures from BNY Mellon, custodian of nearly a fifth of the world’s financial assets, show net inflows to 10-year UK bonds of £13.4 billion this year, most of them gilts, while cross-border trading has seen net outflows of £6 billion.

Laud said political uncertainty in the UK has deterred foreign investors from investing in the UK, with questions about how the post-Brexit relationship will affect trade flows, prompting some investors to wait for more clarity Has gone.

LGIM is the UK’s largest defined contribution pension provider, and is preparing to implement Chancellor Jeremy Hunt’s initiative to invest 5 per cent of such pension funds in unlisted equities by 2030. while Laud said the move would be “supportive” in efforts to revive the sick. In the UK stock market, she would like to see “an approach that covers all other aspects as well”.

“We can certainly do more to provide financing in the beginning, but we need to make sure that we provide these companies with the right environment to live, grow, the right labor market, the right support technology infrastructure – the entire framework matters before a company decides where to list.”