Axa stubbing out its £1.3bn in tobacco investments could have both short and long-term negative consequences for the industry – a physical overhang of shares, and setting a precedent among insurers. In the short term, pouring its holdings onto the market will create a supply of shares that is unlikely to be met with offsetting demand – this is a time of uncertainty for the industry, created by the Tobacco Products Directive, which set stricter rules for cigarette packaging and vaping in Europe. Over the long term, tobacco shares have significantly outperformed broader markets and are, at a time of near zero interest rates, some of the best dividend payers. Axa is giving up potential future returns from its tobacco investments, but could gain kudos and even win new business from ethically-sensitive customers. Insurers like Axa are significant market participants. If it sets a precedent of ethical investing, and other insurers were to follow suit, the £1.3bn could snowball into tens of billions.
Darius McDermott, managing director at Chelsea Financial Services, says No.
The end of the tobacco sector has been called many times: when smoking in public places was banned, when advertising on packets was banned, and when the law suits started. But it carries on regardless. There are no new entrants, so competition isn’t a problem and firms have pricing power. And it is estimated that there will be more smokers in the world mid-century than there are now. It’s not going anywhere soon. It could even adapt and buy e-cigarette makers. If you want responsible investing, there are funds out there that purposely screen out sectors like tobacco. But as long as there is an investment case for these companies, other funds, which are simply trying to make money for investors, will still see this sector as very attractive, especially as it produces good dividends. It’s been the best performing sector over the past century and the gains were not all made before we realised smoking was bad for us. Over the past decade, the past year, and even the past month, tobacco companies in the FTSE All Share have outperformed the wider market.