London-based Legal & General Investment Management (LGIM) yesterday presented its investment outlook for the fourth quarter of 2023, delving into the team’s convictions across asset classes and geographies.

Sonja Laud, chief investment officer at Legal & General Investment Management (LGIM), said at a media briefing yesterday that investors should brace themselves for a recession in the US and Europe.

Despite the warning lights, Laud said recession still hasn’t arrived. “We’ve been wrong on the timing and now expect the US recession to land in the first half of 2024,” she continued. She believes that equity analysts are not buying into the recession outlook, saying that the recession risks and macro uncertainty are not well priced into markets.

Laud thinks that interest rates will stay higher for longer, and headline inflation will remain above target, reaching 3 per cent by the end of 2024.

She highlighted that China has been following a slightly different dynamic, as it came out of Covid-19 later. “We have been cautious about the country for a while,” Laud said. “What we are seeing in China is a balance sheet recession, which is not just due to Covid-19, but more what has happened in the past 10 years, in terms of over investment in property, in particular.” 

“Based on our estimates, the Chinese government is accepting that it’s a slow process and it is working through the excesses, supporting where needed, without over stimulating the economy,” Laud continued. She believes that it will roughly be a three-year process to unwind the overhang, but thinks China is in a stabilising phase. “The ongoing tension between China and the US is also intensifying, and this could offer investors opportunities elsewhere, like in India and South Africa,” she added.

Laud pointed out that markets have been surviving, but only a few assets are thriving: “The gains are concentrated in technology mega-cap stocks in the US, driven by artificial intelligence.” 

Laud believes that equity markets are still led by tech stocks, with tech and AI-related mega cap stocks driving equities higher. “The explosive launch of ChatGPT in late 2022 brought home the immense potential of generative artificial intelligence (AI). This is a type of AI that processes data to create new content – from text, to code, to molecular design and even art,” she continued.

“We have been well aware of AI for years. But the ability to generate material indistinguishable from that created by people, at almost unimaginably greater speed, suggests we have reached an inflection point. This places us firmly on the cusp of a new age of innovation,” Laud said.

Fixed income
LGIM said that government bonds have been a reliably unreliable equity hedge since early 2021. Gilts have also been outperforming other markets as idiosyncratic inflation fears subside. LGIM believes that cash, which is yielding 5 per cent with no duration, credit or cashflow risk, is now competitive with equities and credit, which hasn’t been seen for over two decades. The firm thinks that credit spreads are tracking sideways, with investment grade credit insufficiently compensated today, relative to risk-free assets. The firm sees asymmetric risks in credit, with greater potential for outsized losses.

Asset allocation
“We maintain a cautious outlook,” Laud continued. She said the firm is underweight in equities, as she thinks the pricing of a soft landing is too optimistic, and the earnings revision will come under pressure, with more pressure across the board in equities. “We are underweight in credit and a neutral position on real estate,” she added. Within fixed income, LGIM is positive on government and high yield bonds, as well as emerging market debt. See other investment managers views on bonds here.