Jamie Clark

Is the FDA stubbing out tobacco stocks?

Jamie Clark

At the end of July the tobacco industry was dealt another blow, this time by the US Food and Drug Administration, which committed to cutting nicotine levels in a bid to reduce addiction to cigarettes. This intervention reinforces why we have long-avoided tobacco stocks within our Macro Equity Income and Macro UK Growth funds.

Since November 2012, against a backdrop of increased smoking restrictions in emerging markets and cigarette branding bans coming into force, we have employed an Avoiding Tobacco theme. We saw the emergence of an attitude shift, which, we felt, may eventually lead to the sector finally being consigned to the ex-growth bucket.

The FDA was first given powerful tools to reduce the harm caused by tobacco when the Family Smoking Prevention and Tobacco Control act was passed in 2009, and finally it seems they might use them, with the body’s Center for Tobacco Products now working on a regulatory plan to confront cigarette addiction. On the day of the FDA’s July announcement, tobacco stocks from both sides of the Atlantic encountered a sell-off, with British American Tobacco shares falling c.7% and Altria Group down nearly 10%. They have yet to recover.

The touchstone for tobacco regulation – the World Health Organization Framework Convention on Tobacco Control (WHO FCTC) – has been in force since 2005 - 180 countries are signatories and it’s legally binding in 168 countries - and we expect regulation to continue choking tobacco companies’ profits. Developing markets have already followed the lead of developed markets in legislating to curtail the industry’s activities and contain its manifold economic externalities, which include escalating healthcare costs.  

Furthermore, we remain sceptical about the ability of next generation tobacco products, such as vaping, to replace smokers. We believe that the barriers to entry in this market are limited, so incumbent players are not only competing with each other, but new players too.

So as the FDA wages war on addiction to cigarettes, where else might investors look? We believe the telecoms is well positioned to take the reins from tobacco as the foremost ‘addiction’ income play, given consumers’ dependence on data consumption. In our Global Telecoms theme, we take the view that a content-led offering will be key in enabling operators to leverage unprecedented rates of data consumption and convert it to top line growth.

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Thursday, August 3, 2017, 9:45 AM