Pharma Stocks a ‘Buy’: UBS

Pharma Stocks
Pharma Stocks

Investors can expect a muted first-quarter earnings season, and should add pharmaceutical stocks to their portfolios to guard against potentially rocky times ahead, according to investment bank UBS.

“We’re still seeing a rocky recovery,” Nick Nelson, European equity strategist at UBS, told CNBC’s “Squawk Box Europe.”

“It’s a rolling crisis, with good news then bad, and you need to have some defensives in your portfolio — the trick is which one? Telecoms and utilities really aren’t as defensive as they used to be, so pharma is our top pick.”

Pharmaceuticals are seen as one of the classic defensive stocks, with the reasoning that people still get sick no matter how the economy is performing. They have faltered in recent years, however, as investors worry about new legislation in the U.S., by far the world’s biggest market for medicines, and the lack of new products coming through to replace blockbuster drugs that are coming off patent.

“There are negative headwinds for the sector, with government spending and generics the two big ones,” Nelson said. “We think you get to the patent cliff in (the fourth-quarter) this year so you’ll get some of that bad news out of the way.”

He added that growth in emerging markets would set off some of the negative headwinds, and pointed to strong dividend yields for the bigger pharma companies.

“In the more cyclical space, we still like some energy companies and bits of tech, particularly software,” he added.

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Disclosure information for Nick Nelson and his company was not immediately available.