Analysts rewrite investment strategies after terrorists shake the equity markets

Defensive Shares

Equity market analysts were hurriedly rewriting their investment strategies yesterday in the search for stocks and sectors that stand to gain in the changed political and economic environment.

Equity market analysts were hurriedly rewriting their investment strategies yesterday in the search for stocks and sectors that stand to gain in the changed political and economic environment.

While the UK market swung violently between gains and losses all day, clear winners were showing through. The day's biggest gains were made by the food retail, telecoms and pharmaceuticals sectors.

Goldman Sachs rushed a note to their clients yesterday morning entitled "US attacks turn our European strategy on its head". Mike Young, head of European strategy at the investment bank, said the increased likelihood of a serious recession should favour companies that tend not to be impacted by an economic downturn. "We expect that energy and the more defensive segments of the market, including pharma, food producers, beverages, tobacco, food and drug retailers and utilities will outperform in the near term," Mr Young said.

The UK's giant pharmaceutical companies GlaxoSmithKline and AstraZeneca saw their share prices rise by at least 8 per cent as investors reckoned that demand for drugs products would not be affected by the threatened collapse in consumer confidence.

For a similar reason, the other big sector to surge yesterday was food retail. The biggest supermarket chains – Tesco, Safeway, J Sainsbury and William Morrison – all saw their shares jump by 7 per cent.

Martin Brooker, European strategist at Credit Lyonnais, said investors should look back to the Gulf War when the world was also in the grip of a sharp economic slowdown. "Over the length of the Gulf War, the pharmaceuticals sector outperformed the market by 70 per cent," he said. "And when you have Colin Powell, the Secretary of State, saying that the US is treating this as an act of war and will react accordingly, then perhaps it is appropriate to draw comparisons."

Mr Brooker's analysis shows that shares of drinks companies outperformed the market by 40 per cent during the Gulf War while food manufacturers beat the market by 16 per cent. "Investors have been moving from defensives into economic recovery plays like the packaging sector in the last six weeks. We think that will now reverse."

Many analysts were not publishing their usual strategy notes yesterday or speaking publicly. But some strategists were privately telling clients that there were good opportunities in the telecoms sector.

British Telecom led a rally for telecoms shares, up more than 11 per cent, with Vodafone up 8 per cent. Some analysts predicted they could now be treated as "defensive growth" plays, effectively utilities whose products don't count as the sort of discretionary spending that would get reduced by increasingly cautious consumers.