Legal & General (LSE: LGEN) shares fell heavily last week and Hargreaves Lansdown took the opportunity to snap them up. In fact, LGEN was actually the most purchased stock on the investment platform for the week (3.85% of all purchases).
I’ve owned Legal & General shares in the past but I sold out a few months ago at higher prices. Should I follow the crowd and buy them now? Let’s discuss.
Legal & General shares: is now the time to buy?
When I saw how far Legal & General’s share price had fallen last week (246p to 217p), it grabbed my attention. With the stock trading on a P/E ratio of six, and offering a prospective yield of 9%, it certainly looked appealing. However, then I started digging deeper. And what I uncovered was a little concerning.
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Implications of the gilt crisis
You see, the recent volatility in the gilt (UK government bonds) market could have had some big implications for Legal & General.
That’s because it’s a major player in the LDI (liability driven investment) space. This type of investing is common when dealing with defined benefit pensions. Put simply, it involves projecting future liabilities (of a pension scheme, etc) into the future and then generating returns from available assets (equities, bonds, gilts, gilt derivatives, etc) to meet these liabilities.
The issue here is the use of gilt derivative positions means LDI strategies are not suited to volatile conditions in the gilt markets. If volatility spikes, firms can face margin calls on their derivative positions.
So as Bryce Elder in the Financial Times recently wrote, Legal & General’s need to front up extra collateral last week — to meet margin calls as gilt values plummeted — would have been “huge”. This creates some uncertainty in relation to the company’s balance sheet and liquidity.
Uncertainty
Now it’s worth noting that plenty of analysts believe this issue won’t hurt Legal & General too much.
“Many UK life insurers would have faced cash calls to satisfy variation margin requirements on their interest rate hedge positions this week – this would have been most meaningful for insurers with large annuity books – however we expect this to be manageable given their strong liquidity buffers,” said Moody’s analyst Brandan Holmes last week.
In the case of Legal & General, analysts at JP Morgan said: “We do not believe the on-balance sheet pensions, annuity or PRT business of L&G faces any particularly liquidity crunch or capital issue — and it is not a forced seller of assets in these businesses.”
However, we won’t know the full impact of the recent gilt crisis on the company until it posts its next results. So there is some uncertainty here.
My move now
Given the uncertainty, I won’t be buying Legal & General shares for my portfolio just yet. I still like the company, I think it has good long-term prospects, and the yield is certainly attractive at present.
However, I want more clarity on this situation before I invest. So I’m going to keep the stock on my watchlist for now.
