The bearish news came as the London stock market continued to be gripped by the nerves which have afflicted it since Friday's 88-point plunge, ending just 8.2 points higher at 3,990.7 at the close yesterday after having been more than 27 points up earlier in the session. In New York, the Dow Jones Industrial Average plunged 98.81 points to end at 6,303.
Legal & General, which manages close to pounds 50bn of funds, said it planned to be a net seller of UK equities and raise cash balances from around 3 per cent to as high as 6 per cent of its portfolio next year ahead of what it expects to be growing inflationary pressures in the economy. The group compared the pounds 21bn of impending mutual societies flotations with the enormous equity withdrawal from soaring house values during the "Lawson boom" of the late 1980s. Such windfall gains could "leak" back into the broader economy at the rate of between pounds 5bn to pounds 10bn a year, equivalent to 4p off the basic rate of income tax, the group claimed. That will help fuel a 4 per cent growth in consumer spending next year, L&G believes, the first time since 1988 and 1989 that growth has reached 4 per cent.
After a storming 16.2 per cent return in 1996, the group is expecting the return to slow to just 4 per cent over the next 12 months with the FTSE 100 index ending the year around the current level of 4,000.
M&G, the fund management group, also said yesterday it expects a subdued performance from the stock market as a whole next year.
US industry sources also confirmed that since the markets' jitters began last week, the torrent of cash into mutual funds has slowed.