Safer to own than to consume, tobacco stocks have earned enormous returns for investors during the euro zone crisis, mimicking the safe haven of the fixed-income markets sought by jittery investors.
And despite a sluggish performance this year — tobacco shares have fallen by 2.5 percent, against a 6 percent rise for the FTSE 100 index — tobacco will continue to provide a healthy return for longer-term investors, according to Edmund Shing, Head of European Equity Strategy at Barclays.
Almost on cue, Imperial Tobacco shares finished strongly in the black on Thursday, after the release of a rise in full-year revenue. Imperial was able to counter flagging sales in tough European markets with price rises.
“You have to bear in mind that it’s been the best performing sector by a long way over the last ten years,” Shing told CNBC on Thursday. “Anyone who’s been holding tobacco for the last five to ten years has made an absolute killing. Whether with BAT, whether with Altadis, whether with Imperial Tobacco.”
Imperial has looked to emerging markets for growth, despite a new-found consciousness of the dangers of smoking in the developing world. Russia’s parliament are currently debating a public ban on smoking, but Shing doesn’t see that as a cause for concern. “You would have argued exactly the same with the western markets. They’ve managed to sidestep that already and managed the decline.”
In fact, the very nature of tobacco — the difficulty with which users have in kicking it – is the attraction of the sector. “I think what you have to bear in mind is it is still an addictive product and how many addictive products can you think of in this world?”
Shing was more cautious on the outlook for the wider market. Recent stock market exuberance stems largely from the efforts of central banks to tackle the euro zone crisis by adding liquidity to the monetary system. Buying could quickly fade as “the reality may well hit that the macro is in a very difficult place”.
But the outlook is much more positive for long-term investors, such as those working with pension funds. “On a relative asset allocation basis, European equities represent very good relative value, but that’s partly because bonds and cash look so awful right now,” he said.