Investment view: Despite all the crowing, it pays to be cautious

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The Independent Online

GlaxoSmithKline Our view: Keep buying

Price: 1406.5p (-1.5p)

Astrazeneca Our view: Hold

Price: 2896.5p (+12p)

After the gloom of the double-dip recession, the Government was crowing yesterday thanks to the economy apparently roaring back with growth of 1 per cent in the third quarter. So, is it time to dive into the stock market for some of the more risky plays out there?

Certainly some investors did. The FTSE 100 reacted with a shrug of the shoulders to post a small gain, but these days it is an international index dependent on commodities, international finance and the like.

The FTSE 250 index of second-tier, much more UK-focused companies, posted a very solid gain, suggesting the market looked at the figures with starry eyes.

But there are grounds for caution. The GDP figure was flattered by a number of one-offs and confidence remains pretty fragile.

That's why I'm going to look at GlaxoSmithKline and AstraZeneca, generally considered defensive plays valued more for the ability to pay solid dividends than for runaway growth.

Astra, which posted third-quarter results yesterday, isn't quite as defensive as it once was. The Anglo-Swedish drugs group has been battered as patents have run out on key treatments with a lack of new innovations to replace them. Third-quarter sales fell to $6.2bn (£3.8bn) against $8.2bn for the same period in 2011. That's down by 19 per cent, 15 per cent after smoothing for currency fluctuations. Operating profits were also hit, coming in at $2.2bn from $4.3bn, a tumble of 49 per cent (47 per cent at constant currencies).

There were a couple of disposals, but the problem was that a number of key treatments no longer have patent protection in the lucrative US market.

While the numbers might look scary, the problem is priced into the shares, which trade on just 7.8 times this year's forecast earnings, while yielding a shade above 6 per cent. Even with the reduction in earnings, the payout is twice covered.

Astra, it's true, suspended plans for share buybacks to give it flexibility to do deals and buy more treatments, when Pascal Soriot was hired to replace the ousted David Brennan as chief executive. The good thing is most analysts believe the divvy is stable. And it's very attractive.

I'm usually wary of mergers and acquisitions, but Astra's could use a shot in the arm from somewhere. At the very beginning of July I said the innovative tie-up with US peer Bristol-Myers Squib for the £4.5bn takeover of US biotech Amylin, with its potential blockbuster diabetes drugs, made it worth a punt. At the time it stood at 2,882p. The shares are little changed since then. I'm inclined to stick with them, but wouldn't buy more until we've seen more detail on Mr Soriot's plans. Hold.

GlaxoSmithKline is in a much happierplace, with less of a reliance on blockbuster drugs and a useful place in the consumer healthcare business in emerging markets, where the demographics are very much in its favour.

The shares are down a shade from where I said buy at 1,427p on 17 April, despite a run of resilient financial statements which suggest that everything at GSK is running smoothly. Perhaps the explanation is that investors are shunning safe, boring-looking big pharma stocks like GSK in favour of more excitement. I can't blame them.

But I'm not convinced that either the British or the global economies are out of the woods. You only need another wobble in the eurozone, more stupidity in the US congress over that country's debt mountain, or any number of other possible shocks to knock things sideways.

As such, I'd want a quality, defensive, stock like GSK on my side. On 12 times this year's forecast earnings it's no screaming bargain. But quality costs money, and the 5 per cent forecast yield is well worth having.