Weak pound boosts defensive stocks
Oct 23, 2009
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Pharmaceuticals are looking cheap and cheerful
While the overall market has rocketed, high-quality defensive stocks have been left behind. And there's now another factor boosting their appeal: the renewed down trend in sterling, which has fallen to a five-month low in trade-weighted terms and a four-month low against the greenback.
Sterling matters because the market, as represented by the MSCI UK Index, receives just 35% of its revenues from Britain, according to Morgan Stanley's Graham Secker. He also notes that stocks that report in dollars comprise 47% of market earnings and 45% of dividends.
So a weak pound implies a boost to profits and payouts. In 2008 the pound averaged $1.85, compared to $1.55 so far this year. This 15% depreciation to date implies a 7% rise in UK earnings and dividends this year, says Secker. Major dollar reporters or earners include many of the defensive stocks MoneyWeek has highlighted this year, such as BP, Shell, GlaxoSmithKline and AstraZeneca.
Pharmaceuticals are still looking especially cheap, says Tim Price of PFP Wealth Management. Meanwhile, Astra and Glaxo are on yields close to 5% and low price/earnings multiples.
The big picture: public debt points to inflation
Government debt across the world is far higher than official estimates suggest, says Dylan Grice of Société Générale. Official figures don't include the "eye-watering" cost of future pension and health benefits they have promised their populations, for which no money has been set aside.
With population growth now slowing, there are fewer workers per pensioner and these social programmes will cost multiples of expected tax revenues. Factor in these unfunded liabilities and public debt rockets, according to the Cato Institute's Jagadeesh Gokhale.
Expect governments to default by allowing inflation to let rip.
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