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UK defensive stocks: a house divided

Political Britons who attended election-night parties this week will have required the products of companies dubbed “defensive” for morning-after support. The prospect of a hung parliament will have left some popping headache pills. Others will have needed a cigarette or stiff drink to steady their nerves.

But it was the weakening pound rather than rising sales that bolstered many defensive stocks before markets stabilised. Political uncertainty has split this group of equities since last year’s Brexit vote. Doubts over the long-term dependability of earnings — supposedly their defining characteristic — may also make the category obsolete.

Falling sterling lifts the share prices of companies with heavy foreign exposure. Banks have been divided by the phenomenon. Shares in Asia-focused HSBC have risen over 50 per cent in a year. Those of insular Lloyds have stayed put.

The theory that political weakness presages a softer Brexit and a stronger economy sounds like wishful thinking to many fund managers. Lengthy low interest rates are more certain and broadly bad for bank earnings. Banks remain exposed to political backlashes as are utilities.

The profits outlook is cloudy for other defensives. Shares in AstraZeneca and GSK have risen steeply since the referendum due partly to low sterling income. But earnings from old blockbuster drugs are running off before replacements have won regulatory approval.

Cigarette groups such as BAT have benefited just as much from a lower pound on the other side of the kill/cure divide. However, big tobacco is vulnerable to better ecigarettes in the short term and, long term, to smokers in emerging economies kicking the habit.

Only big consumer products groups can offer UK investors dependable earnings, a currency hedge and a decent growth story. Step forward Reckitt Benckiser, owner of Nurofen headache pills and Diageo, manufacturer of Johnnie Walker whisky.

Email the Lex team at lex@ft.com