By Jaisal Pastakia, Investment Manager at Heartwood Investment Management
The US healthcare sector has been a notable underperformer since the presidential election, saddled by issues around competitive drug pricing and the Affordable Care Act (ACA). Stocks have been under further selling pressure this week as US Congressional discussions begin to repeal and replace the ACA. This political overhang is likely to stay in the short term, but we also think that some of the market’s concerns are overdone. Ultimately, our view is that a Republican president and a Republican-controlled Congress will probably provide a more corporate friendly environment – via tax cuts and a desire to reduce the regulatory burden – than perhaps if Hillary Clinton had been elected. Furthermore, the healthcare lobby in Washington is a powerful force, being the largest spender by some margin versus other industries. Its financial clout suggests that any legislative change would be difficult to implement if it were seen to be a negative for the industry.
Longer term, the healthcare sector remains underpinned by the following structural trends:
- Ageing demographics, rising life expectancy and growing consumerism in healthcare. According to the United Nations, the proportion of the population aged 60 and over is expected to nearly double between now and 2050. Rising life expectancy, a phenomenon being experienced in both developed and developing nations, implies increasing levels of healthcare spending to treat chronic illnesses, such as heart disease, cancer and diabetes. Global spending on health as a proportion of GDP was 9.9% in 2014, according to the World Health Organisation. Some of the largest spending increases have been seen in emerging market economies as their middle class populations expand, particularly in South East Asia and the Middle East.
- New discoveries through technological advancements and innovation:: The biotech revolution represents one of the most exciting areas of technical innovation. Since the mapping of the human genome in 2000, the pharmaceutical industry has made enormous strides into developing therapies to treat and prevent disease. Gene therapy, a technique that modifies the genetic code to correct cell irregularities, has been used to develop treatments for a range of conditions, including certain cancers. More recently, scientists have made far-reaching progress in stem cell research, developing innovations in areas such as organ transplants. Advances are also underway in neuro-engineering, where theoretically brain implants could be used to treat conditions such as Alzheimer’s and Parkinson’s. Outside of therapeutics, progress is being made in diagnostics and imaging technologies, and in the delivery of services – for example, treating patients with long-term conditions remotely.
At present we believe that the healthcare sector is priced at a more attractive entry point, especially if considered relative to the broader US equity market. Moreover, there have been wide divergences between sub-sectors, with biotech seeing the most underperformance. Potentially, this may present opportunities for greater synergies and industry consolidation. In particular, the life cycle of new product launches from conception to market is a multi-year/multi-decade process. Rather than commit significant resources and capital to developing therapeutics, it can be more cost efficient for larger pharmaceuticals to acquire the research and development of smaller, biotech pioneers.
We believe that the long-term risk/reward profile of healthcare represents a compelling opportunity. However, as we have seen in recent months, investors need to be prepared for volatility, particularly lower down the market-cap spectrum.
UK earmarks a further $2.3 billion for its COVID vaccine push
LONDON (Reuters) – British finance minister Rishi Sunak will announce an extra 1.65 billion pounds ($2.30 billion) to fund the country’s fast vaccination rollout as part of his annual budget statement on Wednesday, the finance ministry said.
“Protecting ourselves against the virus means we will be able to lift restrictions, reopen our economy and focus our attention on creating jobs and stimulating growth,” Sunak said in a statement.
Britain has so far given a first vaccination more than 20 million people, or more than one in three adults, Europe’s fastest vaccination rollout.
“The new money will continue to vaccinate the population and ensure every adult is offered a dose of a vaccine by July 31,” the ministry said.
A further 33 million pounds will be spent on vaccine testing and development to protect against future outbreaks and variants and 22 million pounds will fund a study to test the effectiveness of combinations of different COVID-19 vaccines.
(Writing by William Schomberg; editing by Philippa Fletcher)
Wall Street Week Ahead: Investors weigh new stock leadership as broader market wobbles
By Lewis Krauskopf
NEW YORK (Reuters) – A shakeup in stocks accelerated by the past week’s surge in Treasury yields has investors weighing how far a recent leadership rotation in the U.S. equity market can run, and its implications for the broader S&P 500 index.
Moves this week further spurred a shift that has seen months-long outperformance for energy, financial and other shares expected to benefit from an economic recovery, while a climb in Treasury yields weighed on the technology stocks that have led markets higher for years.
The two-track market left the benchmark S&P 500 down for the week, and sparked questions about whether it could sustain gains going forward if the tech and growth stocks that account for the biggest weights in the index struggle.
So far this year, the S&P 500, which gives more influence to stocks with larger market values, is up 1.5%, while a version of the index that weights stocks equally is up 5%.
“That just tells us the gains are less narrow, more companies are participating, and I think that’s healthy,” said James Ragan, director of wealth management research at D.A. Davidson.
The focus on market leadership comes as investors are weighing whether the S&P 500 is due for a significant pullback after a 70% run since March, with the rise in long-dormant yields the latest sign of trouble for equities as it means bonds are more serious investment competition. The yield on the 10-year U.S. Treasury note this week jumped to a one-year peak of 1.6% before pulling back.
Economic improvement will be in focus in the coming weeks, including the monthly U.S. jobs report due next Friday, as will the country’s ability to ensure widespread coronavirus vaccinations, especially as new variants emerge.
Tech and momentum stocks helped drive returns in 2020 “when everyone was locked down and all they had was their computer,” said Jack Ablin, chief investment officer at Cresset Capital Management. “Now it seems with the vaccines, the stimulus and the prospect of reopening that we are looking out toward a recovery phase.”
The shift in the market this week is building on one that was fueled in early November, when Pfizer’s breakthrough COVID-19 vaccine news generated broad bets on an economic rebound in 2021.
Among the moves since that point: the S&P 500 financial and energy sectors are up 29% and 65%, respectively, against a nearly 9% rise for the benchmark index and 7% rise for the tech sector. The Russell 1000 value index has gained 16.5% against a 4.3% climb for its growth counterpart, while the smallcap Russell 2000 is up 34%.
“You definitely are seeing the reopening trade that has pretty much come alive here,” said Gary Bradshaw, portfolio manager of Hodges Capital Management.
Despite the gains, there remains “plenty of room for the reflation trade to run from a valuation perspective,” Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, said in a report this week. RBC is “overweight” the financials, materials and energy sectors.
Rising rates tend to be favorable for more cyclical sectors, David Lefkowitz, head of Americas equities at UBS Global Wealth Management, said in a note, with financials, energy, industrials and materials showing the strongest positive correlations among sectors with 10-year Treasury yields.
Still, how long the market’s reopening trade lasts remains to be seen. Investors may be reluctant to stray from tech and growth stocks, especially with many of the companies expected to put up strong profits for years.
Any setbacks with the economy or with efforts to quell the coronavirus could revive the stay-at-home stocks that thrived for most of 2020.
And with a GameStop-fueled retail-trading frenzy taking hold this year, banks and other stocks in the reopening trade may fail to draw the same attention from amateur investors as stocks such as Tesla, said Rick Meckler, partner at Cherry Lane Investments.
“There isn’t the pizzazz to those stocks,” Meckler said. “There rarely is a potential for stocks to make the kind of moves that big tech growth stocks have made.”
(Reporting by Lewis Krauskopf; editing by Richard Pullin)
Exclusive: European officials urge World Bank to exclude fossil-fuel investments
By Kate Abnett and Andrea Shalal
WASHINGTON (Reuters) – Senior officials from Europe have urged the World Bank’s management to expand its climate change strategy to exclude investments in oil- and coal-related projects around the world, and gradually phase out investment in natural gas projects, according to three sources familiar with the matter.
In the six-page letter dated Wednesday, World Bank executive directors representing major European shareholder countries and Canada, welcomed moves by the Bank to ensure its lending supports efforts to reduce carbon emissions.
But they urged the Bank – the biggest provider of climate finance to the developing world – to go even further.
“We … think the Bank should now go further and also exclude all coal- and oil-related investments, and further outline a policy on gradually phasing out gas power generation to only invest in gas in exceptional circumstances,” the European officials wrote in the letter, excerpts of which were seen by Reuters.
The officials took note of the World Bank’s $620 million investment in a multibillion-dollar liquified natural gas project in Mozambique approved by the Bank’s board in January, but did not call for its cancellation, one of the sources said.
The World Bank confirmed receipt of the letter but did not disclose all its contents. It noted that the World Bank and its sister organizations had provided $83 billion for climate action over the past five years.
“Many of the initiatives called for in the letter from our shareholders are already planned or in discussion for our draft Climate Change Action Plan for 2021-2025, which management is working to finalize in the coming month,” the Bank told Reuters in an emailed statement.
The Bank’s first climate action plan began in fiscal year 2016.
The United States, the largest shareholder in the World Bank, this month rejoined the 2015 Paris climate accord, and has vowed to move multilateral institutions and U.S. public lending institutions toward “climate-aligned investments and away from high-carbon investments.”
World Bank President David Malpass told finance officials from the Group of 20 economies on Friday that the Bank would make record investments in climate change mitigation and adaptation for a second consecutive year in 2021.
“Inequality, poverty, and climate change will be the defining issues of our age,” Malpass told the officials. “It is time to think big and act big in finding solutions,”
He said it was also launching new reviews to integrate climate into all its country diagnostics and strategies, a step initiated before the letter from the European officials, said one of the sources.
(Reporting by Andrea Shalal in Washington and Kate Abnett in Brussels; Additional reporting by Valerie Volcovici in Washington; Editing by Matthew Lewis)
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