Speculation that Russia could ban smoking in public places confirmed for many that silly season in the market has another week to run. But the mere thought that Russia, with its 43.5m smokers, might consider banning cigarettes from public spaces was enough to knock the share prices of big tobacco companies and showed that regulation, or the threat of it, still has a wide-ranging impact. That said, it is impossible to escape the impression that the fundamentals still stack up for tobacco shares, as long as Imperial Tobacco and British American Tobacco can find the savings and price rises to keeping dividends flowing.
A rolling tide of regulation, beginning with plain packaging in Australia, meant tobacco shares suffered over the summer; the FTSE tobacco index is down 10 per cent since the start of August. France is also talking about introducing Australian-style plain packaging, which would see the end of Gauloise's distinctive packets; a consultation on introducing similar measures in the UK finished last month.
The problem for investors, and analysts, is that the brand value of cigarettes in relation to the effect on earnings is difficult to establish, particularly in markets where there has been no direct advertising of cigarettes for more than 30 years. A widely reported estimate from Nomura analysts is that plain packets will knock more than 20 per cent from sales over a decade, mainly due to an increase in counterfeiting activity. Imperial Tobacco, with its high exposure to mature markets is at the biggest risk from regulatory action - its shares have fallen twice as fast as BAT's since August, with investors preferring BAT's more global profile.
