Frank Furedi

Troubling as it may be, fear sells
Barbara Wall

Some see companies preying on insecurity; others cite innovation.

It sometimes seems that the more wealth a society creates, the more insecure it becomes. Companies are preying on our anxiety about natural disasters and pandemics and obesity and terrorism to sell a growing range of products and services. Are these fear entrepreneurs cynical self-promoters, or ideal investments for uncertain times? Probably a little of both.

Frank Furedi, a professor of sociology at the University of Kent and the author of the books "Politics of Fear," "Culture of Fear" and "Paranoid Parenting," says that business leaders are extremely talented at harnessing anxiety to sell products - even when our perception of fear bears little relationship to actual experience.

For example, even as politicians proclaim that crime rates are falling, the market for household alarms and personal security gizmos is booming.

Consider child-tracking devices, the latest hot products in the security business. Sprint-Nextel and Verizon have come up with products that let parents track a child's mobile phone for as little as $10 a month. If that sounds over-the-top, high-tech Halloween costumes, with tracking devices that allow parents to keep track of their little trick-or-treaters, were on sale this autumn at Angels Fancy Dress in London for £500, or $945, apiece.

That, Furedi said, is nothing but marketing. "There is no evidence to suggest that the incidence of child abductions is any greater today than, say, 40 years ago," he said. "But parents are being encouraged to fork out large sums of money for peace of mind."

Experienced investors will recognize the link between fear - and its counterpart, greed - in explaining and understanding stock market dynamics.

"One reason why stock markets display such a strong average growth is greed," said Frank Westerhoff, a professor of economics at the University of Osnabrück in Germany. "People want to participate in this game, and as they do, they drive prices up. Eventually some traders realize that markets are extremely overvalued. When the markets start to correct, a fear-driven panic sets in, pushing prices down or even crashing the market."

Yet where experts like Furedi and Westerhoff see misplaced anxiety and manipulation, others see innovation and gain.

The insurance industry, for example, is often criticized for making big money by exploiting fear. But Mark Stacpoole, an investment director for Hiscox Insurance fund in London, pointed out that the insurance industry is characterized by fierce competition that has resulted in many policyholders getting a better deal.

"Young males tend to pay higher motor insurance premiums than any other class of driver because statistics show that they are more likely to drink and drive late in the evening, when most accidents occur," Stacpoole said. So Aviva Insurance, a British company, has introduced a new plan that bases premiums on the time of day policyholders use their cars. Drivers are monitored using a global positioning satellite system and charged accordingly: the earlier in the day the car is driven, the cheaper the premium.

Innovation in insurance underwriting, Stacpoole said, has become one of the main drivers of an insurance company's stock price.

"It is no coincidence that Progressive Insurance - one of the first auto insurers in the United States to base premiums on factors other than age and gender - has seen its stock price rise 800 percent over the last 25 years," he said. Stacpoole's fund holds shares of both Progressive and Aviva.

Not surprisingly, Furedi and other skeptics reserve their harshest criticism for military contractors. Love defense stocks or loathe them, there is no question that industry fundamentals have seldom looked perkier. Scott Sacknoff, manager of the Spade defense index, a benchmark that tracks about 50 companies in the military and security sectors, noted that defense budgets were robust and corporate activity within the sector was increasing.

The Spade index, started in 2004 by the International Space Business Council, a clearinghouse for information on the aerospace and military industries, has been trading at historic highs recently, prompting some analysts to speculate that the military spending cycle may have peaked. But Sacknoff said that the upward trend was sustainable. He predicted that U.S. spending on homeland security would increase by around $2 billion a year into 2009.

According to a report released in August by Heavy Reading Enterprise, more than half of the 200 small and midsize U.S. enterprises surveyed indicated that they planned to increase spending on homeland security products and services over the next three years. Analysts said that investors would focus on experience and market leadership when choosing the companies to back - and that the perceived leaders in the field of security technology, were old, familiar names, including Cisco Systems, Symantec, VeriSign, McAfee, Oracle and Microsoft.

While many investors hold stocks of military contractors for diversification purposes - the sector is not strongly correlated with the broader market - others use them as a hedge against geopolitical turbulence.

"In times of uncertainty all stocks tend to suffer, but stocks focused on homeland security and defense invariably bounce back quicker," Sacknoff said.

It is easy to be cynical and dismiss the activities of fear entrepreneurs as disingenuous, but some industries have become the hapless victims of our fears. For example, health care and biotechnology companies have helped create a situation in which people live longer, yet the same industries are widely mistrusted by consumers, Furedi said.

"New drugs are being developed to help us fight disease, yet fear of potential side effects are preventing us from embracing some of them," he said.

Health care and biotechnology stocks are volatile because they react quickly to negative news. But Nora Frey, an investment director at Adamant Biomedical Investment, said that investors would not be easily discouraged by the ups and downs because of the potential for major breakthroughs in cures for diseases like cancer and HIV.

Adamant Biomedical has recently been appointed by Syz, a Basel-based investment management firm, to manage a new fund, the Oyster Oncology Fund, that will focus on cancer diagnostics and treatment. Syz estimated that the market for cancer treatments would grow at an annual rate of more than 10 percent over the next five years, to reach a 12 percent share of the global pharmaceutical industry market.

"Substantial progress has been made in understanding and treating the disease, and there have been numerous exciting advances in the past year, such as in breast, cervical and kidney cancers," Frey said. "We are expecting many more interesting and promising drugs to come to the market in the next five years."

The Oyster Oncology Fund currently holds Roche Pharmaceuticals, which derives 75 percent of its revenue from cancer treatments, and several biotechnology companies, including Genentech, Amgen, Exilixis, Genprobe and Genmap. The last, a Danish company, is rumored to be a potential takeover candidate, Frey said.

Frey's other biotechnology picks include Panacea Biotech, a profitable company listed in India that focuses on vaccines, and Bionomics, an Australian company that focuses on treatments for cancer and multiple sclerosis. She also holds a number of hospital stocks, like Parkway Holdings in Singapore and Network Healthcare Holdings in South Africa, which both stand to benefit from increased government spending on health care infrastructure, she said.

Gordon Elvey, manager of JO Hambro's US

Opportunities Fund in London, has increased the fund's health care holdings in recent months.

"Health care is one of the few sectors in the U.S. where growth looks assured," he said.

"We also expect corporate activity to pick up next year as midsize pharmaceutical companies come under pressure to expand the diagnostics side of their business."

Elvey's main stock pick is Cubist, a U.S. biotech company that plans to introduce early next year a medicine for the MRSA antibiotic-resistant "superbug" staph infection. Novartis, which has the rights to sell the vaccine in Europe, has been mentioned as a potential acquirer of Cubist - another reason, according to Elvey, to buy the stock without fear.

First published in the International Herald Tribune, 17 November 2006