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Are tobacco stocks no longer bulletproof?
by James Phillipps on Oct 23, 2013 at 13:28
The EU’s decision not to classify e-cigarettes as medicinal products could see tobacco stocks lose their reputation as ‘bulletproof’ investments, warns Fidelity’s Aruna Karunathilake.
The European Parliament last week dropped proposals put forward by the UK Medicines and Healthcare products Regulatory Agency (MHRA) that e-cigarettes be more tightly regulated as drugs, a measure that would have seen the cost of the products rise significantly.
The EU’s actions are widely expected to be the starting point for a similar debate about the extent of regulation in the US.
A-rated Karunathilake, who runs the Fidelity UK Select fund, said: ‘The decision by the EU to reject the tobacco industry’s proposal to treat e-cigarettes as medicinal products could mark a turning-point in how the market thinks about tobacco companies as “bulletproof” investments.
‘The rapid take up of e-cigarettes in Europe and the US, combined with the regulator’s relaxed view towards them, creates a good deal of uncertainty for tobacco companies.
‘This is an industry that has always provided an incredibly defensive earnings stream and it will take time for investors to wake up to the fact that this is now being challenged by a less harmful alternative.’
Leap in e-cigarette sales
E-cigarette sales have risen exponentially over the past few years with research by Action on Smoking Health (Ash) indicating the number of UK smokers regularly using them has grown from 3% in 2010 to 11% in 2013, underlining the threat to traditional tobacco companies.
Some have moved to grab a share of the action with US tobacco giants Altria and Reynolds now major players across both markets, but others have been slower to respond.
Predictably, the debate around the merits of e-cigarettes has been driven by an array of opposing agendas, not least big tobacco, health agencies and the Electronic Cigarette Industry Trade Association (Ecita).
The health debate is a particularly thorny one. MHRA wanted e-cigarettes regulated alongside other nicotine products such as gum and patches so their quality can be assured amid concerns about the safety of products from unlicensed providers.
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