Vice is nice for beverages and tobacco

The defensive nature of the drink and tobacco sector could prove a draw in 2011 if austerity upsets the economic apple cart. However, the increasing international scope of the big London-listed players means that investors should be able to find more than just safety in these stocks.

The most domestically focused plays in the FTSE 350 are the soft drink companies, AG Barr and Britvic. The good news for their fans is that the soft drink market proved very resilient to the recent recession and should bear up well again should we see consumer retrenchment in 2011. Indeed, in 2009 the soft drink market expanded by 2 per cent, according to consumer research group Nielsen, despite the woeful economy.

But on top of the possibility of a consumer slowdown, these companies also face rising input costs, which could weigh on margins. In general, share price performance was strong in 2010 and ratings are high, which means any disappointments during 2011 could hurt.

Rising costs are also an issue for alcoholic drink groups SABMiller and Diageo. The international exposure of these companies could help mitigate these concerns though. About four fifths of SAB’s business is in emerging markets where conditions continue to look promising. Meanwhile signs of an ongoing US recovery could benefit Diageo, which has a large exposure to the market, if consumers start to trade back up to its premium brands.

The FTSE 350 tobacco companies, Imperial Tobacco and British American Tobacco, are also noteworthy for their exposure to faster-growing economies and their share prices benefited from their geographic spread in 2010. Growth in emerging markets should continue to provide both companies with the opportunity to push up prices and sell more high-margin luxury brands.

Low-cost brands, which Imperial specialises in, look set to remain very much the flavour of the day in the UK. And the companies will hope the recovery reduces sales of black market cigarettes in favour of their low-priced alternatives. Again cost inflation will be a headwind in 2011, and as always, new regulation has the potential to throw spanners in the works.

The combination of defensive end markets and attractive international exposure bodes well for the beverages and tobaccos sector in 2011 even though there are some noteworthy headwinds in the form of rising input costs and UK austerity. The sector did have a good run in 2010, though, so may suffer if it disappoints now.

BRITISH AMERICAN TOBACCO24814954116.84.222.1
IMPERIAL TOBACCO GP.20192056111.34.24.3
BARR (AG)106041318.32.217.0

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