SVG says pharmas help ease equity market pain

UK large cap pharmaceutical stocks will help ease investors' pain in a volatile equity market but banks are still a bitter pill to swallow, a fund manager at SVG Investment Managers said.

LONDON (Reuters) - UK large cap pharmaceutical stocks will help ease investors' pain in a volatile equity market but banks are still a bitter pill to swallow, a fund manager at SVG Investment Managers said.

Large cap drugmakers are trading at very low valuations but offer high yields, said Adam Steiner, head of research at SVG Investment Managers, which has equity assets of around 400 million pounds.

SVG's top picks include AstraZeneca (AZN.L) and GlaxoSmithKline (GSK.L).

"The market is worried about two things," Steiner said. "If Hillary Clinton wins the U.S. election, it's expected that she'll take another stab at the drugs industry through healthcare reform."

"There is (also) a perception it's getting harder and harder to get new drugs through the Food and Drug Administration -- the regulatory body that has to approve them in the U.S."

GSK shares have been battered in recent sessions after Europe's biggest drugmaker warned that 2008 earnings would fall due to sliding sales of diabetes drug Avandia and more generic competition.

Shares in Anglo-Swedish drugmaker AstraZeneca have also fallen this year, as U.S. patent disputes over its two biggest drugs, Nexium and Seroquel, weigh heavily.

The DJ Stoxx European health care index .SXDP has lost about 7 percent so far this year, compared with more than 10 percent losses in the broader DJ Stoxx 600 index .STOXX.

"The companies are so lowly priced now that even in the absence of growth, you will still get a decent return through a combination of the dividend programmes they've put in place and the share buybacks."

Less-favoured sectors include banks, which have been hit in recent months by a credit squeeze and a meltdown in U.S. subprime mortgages.

"Although they've fallen a lot, we still think it's very hard to see how they'll come up with anything other than earnings down," said Steiner. "They may have bounces over the next three years ... but the reality is that everything that has driven banks' profit growth for the last decade, has gone into reverse."

Steiner pointed to HBOS HBOS.L as an example of the type of bank he was avoiding due to its exposure to mortgage lending.

"Whether it's mortgages or consumer lending or just general credit growth -- that's all in reverse," he said. "All we've seen so far is specific provisions for individual big mistakes that the banks have made. What we haven't seen is general provisioning where they are starting to worry about consumer credit defaults and mortgage defaults."

The start of the banking results season kicked off this week, with Bradford & Bingley BB.L losing more than a quarter of its value in two days, after its shock 226 million pounds of writedowns and other one-off items on Wednesday.

The DJ Stoxx European banking index .SX7P has lost more than 16 percent this year.

"The worry now is about levels of default in the real economy as a result of tightening credit conditions," Steiner said.

The fund manager expected the UK blue-chip index would have "quite a tough time" for 2008, adding that his fund was performing in line with the market. The FTSE 100 .FTSE is down almost 9 percent in 2008.