Tobacco and pharma stocks at their most popular since Lehman Brothers collapse

Published On: May 10, 2022Categories: Stocks & Shares2.5 min read

Every regulated investment bears a disclaimer something along the lines of “Please remember that past performance may not be indicative of future results”. And while that is true, especially when it comes to individual investments, markets are also highly cyclical and patterns within these cycles do have a habit of repeating themselves.

There is always enough nuance and differences in the myriad of details and competing factors to mean we should never presume something that looks like a repeat of something else that happened in the past will lead to the same results. Or even if they do, within the same timeframes. But spotting repeating patterns are, with caveats, also a key tool in the box of market participants.

With that in mind, it’s useful to note a stock market pattern the fund manager JO Hambro has spotted as a repeat of one from 2008 and shared with investors in its UK Equity Income Fund. When the investment bank collapsed, triggering the last international stock markets meltdown, investors moved cash into defensive stocks.

Tobacco and pharmaceuticals stocks were particularly popular and JO Hambro investment managers James Lowen and Clive Beagles have noted that the capital inflows into both sectors are right now at their highest levels since 2008. That’s been at the expense of “cyclical” stocks like consumer discretionaries like hospitality, travel and tourism companies and higher end and larger ticket goods and services that people tend to spend on when they feel financially secure and optimistic about their immediate future prospects.

The missive to investors noted:

“There has been a material rotation towards defensives and away from financials and cyclicals. The valuation between defensives and cyclicals is now at the same extremity as it was after 9/11 and during the Lehman collapse in the financial crisis.”

Investors have been spooked by the extent of inflation’s acceleration over the past few months and the interest rate rises central banks like the Fed and Bank of England are now instigating in an attempt to control it. Many analysts are now convinced interest rate hikes being reactive rather than proactive means they are already too late and will now have to be ratcheted up to a recession-causing level.

The war in Ukraine has intensified inflation and with the kind of controlled interest rate raises that might have otherwise kept it under control now looking out of the question, investors are fleeing to defensive stocks. Berenberg’s co-head of European markets Stewart Cook is quoted in The Telegraph newspaper as commenting on the cycle into defensive stocks with:

“The move to defensive stocks has been exaggerated by the situation in Ukraine, both in terms of defence stocks, like BAE, but also with the rise in energy prices and commodity prices the likes of BP and Shell. These names were previously underowned due to ESG concerns that had dominated investors’ thinking.”

One side effect of the flow of capital into defensive stocks has been that the LSE’s benchmark FTSE 100 index has outperformed every other major benchmark this year. It has performed poorly over the past decade, suffering from a dearth of growth stocks like tech companies. However, its heavy weighting towards more defensive stocks like energy and commodities companies and consumer staples is now proving an advantage.

About the Author: Jonathan Adams

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