The Legal & General (LSE:LGEN) share price is up 9.9% over the past three months. The stock has reversed its downward trajectory amid an improving macroeconomic backdrop.
Interest rates
One of the key factors contributing to the decline in Legal & General’s stock price in the months to September is the rise in interest rates. This has had a multifaceted impact on the company’s performance and share price.
Firstly, higher interest rates have exerted a negative influence on the group’s assets under management (AUM).
During the first half of the year alone, AUM fell by a substantial £132bn to £1.158trn. This represents a significant decline of 10%, versus the £1.29trn recorded in the same period in 2022.
Secondly, as interest rates rise, capital allocation tends to shift towards debt and cash, rather than stocks. This trend could be particularly pronounced for Legal & General, given it’s a dividend stock with an attractive 8% dividend yield.
So when interest rates fall, and they’re expected to in 2024, we could see capital move from cash and debt towards equities like Legal & General.
With traders pricing in 100 basis points of cuts next year, the relative attractiveness of Legal & General and its 8% dividend yield increases. Moreover, this should positively impact AUM.
Already priced in?
Whether falling interest rates are already priced into the Legal & General share price is a matter of opinion. Some investors believe the markets have already priced in the potential for interest rates to fall, while others believe the full impact of falling rates has yet to be felt.
Personally, I think there’s further to go. The stock is up over three months, however it remains 10% below its average target price. Nonetheless, we have to remember that some of these target prices may not be overly current.
The annuity business
The bulk purchase annuity (BPA) market has seen impressive growth in recent years as pension schemes increasingly seek insurance companies to shoulder the liability of their members’ future pension payments.
This trend has also been propelled by rising interest rates, which offer pension schemes greater certainty in securing their retirement benefits.
Perhaps unsurprisingly, Legal & General — an insurance giant — has emerged as the UK’s leading BPA provider.
In 2022, the firm facilitated the highest buy-in and buy-out volumes, totalling a staggering £7.2bn. This reflected around 26% of the market, with the insurer securing two of the year’s largest transactions.
The favourable tailwinds propelling the BPA market are expected to persist. To date, only 15% of the UK’s defined benefit schemes currently transferred to insurance providers, the market remains ripe for further growth.
The BPA market has grown from £10bn in 2016 to over £50bn in 2022. And this is a market that could experience further growth.
My take
So with interest rates rising and the Legal & General dividend sitting at 8%, it could be a good time for me to top up on Legal & General shares.
