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OPINION

Proxy wars dent tobacco, consumables

Proxy wars dent tobacco, consumables
November 23, 2016
Proxy wars dent tobacco, consumables

Admittedly, managers and journalists alike get swept up in the ideas of the moment, and that was a moment when the reality of a low-yield world had fully settled in. International Monetary Fund chief Christine Lagarde had coined the phrase "new mediocre", and the developed world's central banks were holding off interest rate rises and extending quantitative easing programmes.

This was leading many to talk about the 'bondification' of equities, as institutional investors returned to the asset class to provide them with income. It is an idea that has persisted: as recently as this October, SharePad's Phil Oakley was writing for the Investors Chronicle about the view of consumer goods companies as 'bond proxies', and whether investors should be more circumspect in their exposure to them.

Indeed, just as these stocks have benefited from the high price of bonds, so they are losing out as bonds fall - just as Phil warned would happen. And the winds of change are blowing wild and free, to quote this year's winner of the Nobel Prize for Literature. Fiscal policy seems to be getting the upper hand on monetary policy, Donald Trump is heading to the White House with promises of lower tax and increased spending, and as a result bond yields - an inverse indicator of price - are heading higher.

So it's little surprise that the big consumer staples, and I'm including here the tobacco stocks, have fallen, on average, 4 per cent since Mr Trump's victory, against an average rise of 2 per cent for their London-listed peers, according to S&P Capital IQ data.

 

 

Within the former group I'm including Imperial Brands (IMB), British American Tobacco (BATS), Diageo (DGE), Unilever (ULVR), Reckitt Benckiser (RB.) and Associated British Foods (ABF). The chart above shows the performance of an index of these companies against the FTSE 100 over the past five years. These are not total returns, so importantly do not include dividends, but demonstrate that market sentiment to the bond proxies has turned over recent months.

It's another reminder that equity investors are subject to a wide range of variables. Yes, a lot of the market activity around the tobacco stocks will relate the latest consolidation, while the consumer goods companies are having to deal with sterling's fall, but the income appetite of institutional investors is a factor when you are dealing with listed, dividend-paying companies of this size.

It would be a brave person to predict that rock bottom yields are behind us, looking at the history of the global economy since the financial crisis. In the UK, inflation expectations are rising fast, but the latest official data has lagged the Unofficial Marmite Toblerone Index. There is a chance that the market is overestimating the impact that policies will have on prices, and so yields. Thus a dip among the consumables - or even bonds for those seeking even greater security of income - may be a time to buy in, rather than lose heart.