The insurance company, which manages pounds 20bn of funds, has cut its worldwide exposure to equities. Equities have been cashed in and reinvested in bonds, UK index- linked gilts and currencies.
David Shaw, group bond director, said currencies had been bought because of the 'the Government's benign neglect of sterling in blind pursuit of economic growth.'
Index-linked gilts have risen by 17 per cent since Black Wednesday on 17 September. Legal started switching two days later.
The near-300-point rise in the FT-SE 100 index from Black Wednesday, when sterling withdrew from the exchange rate mechanism, to 2,642 points at yesterday's close, enabled Legal to realise profits on its share disposals.
Mr Shaw said: 'Unless, or until, real-world long-term interest rates fall back towards zero, the world economy seems destined to be plagued by continuing asset-price deflation.'
He warned that debt servicing costs would continue to rise and that there would be further balance-sheet retrenchment 'and widespread corporate restructuring and rationalisation.'
Over the last month, Legal has reduced its worldwide equity exposure in managed funds from 85 per cent to 78 per cent. 'If the world recession becomes protracted, then this allocation will need to be reviewed,' Mr Shaw said.
Legal's defensive stance in its equity exposure has led it to focus on overseas earners and utilities.
'Recent asset allocation switches have been driven by concern that if real long-term interest rates are slow to decline, world equities will continue to struggle to outperform world bonds,' Mr Shaw said.
Holdings of UK equities have been scaled back from 61 per cent to 57.5 per cent. 'I expect we'll remain 57.5 per cent invested till the end of the current quarter,' he said.
UK equity exposure has been reduced by straightforward selling of stocks and through the derivatives markets, using a mixture of options and futures.
Legal's bearish stance contrasts starkly with Wellcome Trust, the medical charity and another large UK investor, which has decided to increase its overall equity exposure above 80 per cent.Reuse content