As we look towards the post-coronavirus era, the predominant macroeconomic-investment theme is “reopening and recovery”. Investors have been flocking to pro-cyclical, inflation-sensitive and consumer-discretionary investments. Indeed, we may now be reaching the point where the focus shifts from buying the recovery to factoring in the potential risks to its continuation, such as labour, supply chains, and rising energy prices.
The FTSE All-Share index has delivered a total return of around 13% year-to-date (YTD). A pro-growth, pro-recovery environment is not generally one in which healthcare outperforms, as it is not a cyclical sector. But the YTD total returns of the US and European healthcare indices are 11.6% and 10.5% respectively.
All is not as it seems
These impressive figures belie greater turbulence below the surface, however. Small- and mid-cap healthcare companies, especially biotechnology stocks, have fared poorly. The US Nasdaq Biotechnology index has appreciated only 3%. The US small- and mid-cap Russell 2000 healthcare index is down by 9% in 2021, and the widely followed XBI Biotech ETF has slipped by 12%.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Why is this fast-growing, innovative sector struggling and how long might this go on for? In addition to the broader macroeconomic headwinds, three factors stand out for healthcare. Firstly, in the US the Democrats’ continuing push to append some sort of drug-price reform to the budget reconciliation process is dissuading generalist investors from increasing drug-related exposure.
Secondly, the US Food and Drug Administration has become less predictable over the past nine months, prompting investors to discount any potentially significant upcoming approval decision. This will weigh more on early-stage companies than more mature ones with many approved products.
Lastly, the US Federal Trade Commission has also become harder to anticipate, leading companies to fret that mergers and acquisitions (M&A) will become more time-consuming and distracting to management. An “M&A option” premium has long bolstered market sentiment towards small- and mid-cap healthcare companies, but it has now dwindled.
The problems are in the price
None of these three problems looks likely to be solved soon. However, there comes a point when share prices have arguably discounted the obstacles and fallen to attractive entry points – especially for investors concerned about a worsening economic outlook. Two key themes for us are patients taking more responsibility for managing chronic conditions and the provision of care outside of hospitals and doctors’ surgeries. We like Option Care Health (Nasdaq: OPCH), a specialist in home-infusion therapies allowing people to avoid hospitals.
We are also impressed by Tandem Diabetes Care (Nasdaq: TNDM), which offers “closed-loop” systems to manage insulin-dependent diabetes efficiently: the insulin pump communicates with the glucose monitor to adjust dosage levels automatically. Finally, we like biotechnology group, Sarepta Therapeutics (Nasdaq: SRPT), a gene-therapy pioneer developing solutions for rare diseases. It looks as though this technology may soon fulfil its promise.
-
Lifetime ISA reform: Retirement option could be scrapped in overhaulA consultation on a product replacing the Lifetime ISA is set to be launched this year, and the option to use it to save for retirement is expected to be axed in the shake-up
-
HMRC stamp duty crackdown sees probes of property deals jump 88% – what to watch out forFrom bogus stamp duty refund claims to misleading the taxman about who owns a property, HMRC is increasing its scrutiny of stamp duty land tax reporting. Here’s how.
-
Three promising emerging-market stocks to diversify your portfolioOpinion Omar Negyal, portfolio manager, JPMorgan Global Emerging Markets Income Trust, highlights three emerging-market stocks where he’d put his money
-
Coface offers excess profit in an unloved sectorCoface is a world leader in trade-credit insurance with key competitive advantages in a niche market
-
Exciting opportunities in biotechBiotech firms should profit from the ‘patent cliff’, which will force big pharmaceutical companies to innovate or make acquisitions
-
How to invest in the new breed of payment providersUpstart payment providers are taking the world by storm. It’s time for investors to buy in, says Rupert Hargreaves
-
What turns a stock market crash into a financial crisis?Opinion Professor Linda Yueh's popular book on major stock market crashes misses key lessons, says Max King
-
How to add cryptocurrency to your portfolioA new listing shows how bitcoin might add value to a portfolio if cryptocurrency keeps gaining acceptance, says Cris Sholto Heaton
-
Profit from pest control with Rentokil InitialRentokil Initial is set for global expansion and offers strong sales growth
-
Three funds to buy for capital growth and global incomeOpinion Three investment trusts with potential for capital growth, selected by Adam Norris, co-portfolio manager of the CT Global Managed Portfolio Trust
