Which is why Friday’s announcement of British American Tobacco’s opportunistic $47bn cash and scrip offer for Reynolds American provides pause for thought.
While it is perfectly possible that the deal makes strategic sense for BAT, as several commentators said, given Reynolds American’s exposure to the still lucrative US market and the fact that BAT shares have been given a sharp lift by UK investors looking for large caps with stable offshore earnings in the wake of the Brexit vote. But, it is also worth noting that tobacco stocks more generally have benefitted from the global search for yield and investor preference for consumer staples. On a total return basis, the MSCI Consumer Staples Index is up 125% in dollar terms and 231% in sterling over the past eight years.
That consumer staples stocks are expensive is not news, but in a world with record low interest rates across developed markets and the prospect of further quantitative easing in many countries, many investors remain reluctantly invested. Portfolio Adviser has already pointed out the ongoing switch of focus with bond investors now talking about capital gains and equity investors about yield, but perhaps there are other signs to which one should pay attention. Perhaps, in what many have characterised as the least enthusiastic bull market in recent memory, markers like increased mega M&A are more useful than general investor fervour, when judging how far we are into a cycle.
In a similar vein, while we have yet to see massive spikes up in valuations, or cab drivers starting to dispense stock tips, sentiment is shifting away from those defensive stocks that benefitted from low inflation and falling bond yields and towards other sectors, like emerging markets.