Donald Trump, Elon Musk and Robert F Kennedy Junior (RFK) – the old saying goes that ‘bad luck comes in threes’ and that has certainly been the case for the healthcare sector in recent times.
Despite a number of long-term tailwinds – such as demographic shifts, technological innovation and rising demand in emerging markets – sentiment is at an extreme low, hitting valuations hard. The past 12 months have seen global healthcare stocks fall almost 13%, compared with a 13% increase for the MSCI World.
It seems obvious to say, but the Trump administration has created significant uncertainty and unwanted volatility during its first few months in office. In healthcare, the actions of the administration and the DOGE have already reverberated through several federal agencies.
Drastic staff cuts have begun at the HHS (The US Department of Health and Human Services), with the move being part of RFK’s strategy to shrink and reshape the nation's health agencies.
A report from Protect Our Care found that those most likely to suffer included women and children, those with disabilities, people fighting chronic illnesses like cancer, senior citizens, those battling addiction and mental health issues, LGBTQ+ individuals and people of colour.
From a business perspective, layoffs at health agencies have hampered development-stage biotech, while potential imposed tariffs of 200% or more have raised concerns about future biopharma earnings.
Darkest before the dawn?
The headlines are negative but behind them there are green shoots of optimism. There is a strong case to suggest this uncertainty is already priced into healthcare stocks. Meanwhile, long-term earnings growth is projected to hit 14.2% for 2025. To put this into context, only technology (18%) is higher.
Polar Capital Global Healthcare Trust co-manager James Douglas says in the past four decades there have only been three significant pullbacks in healthcare stocks – early 2003, following the bursting of the tech bubble, 2015-16, driven by political rhetoric and pricing pressure fears, and the current period.
He says: “To us, healthcare stocks are attractively priced. There are obvious headwinds for the sector – US policy risk being one of them – but we could soon reach or already be at ‘peak fear’.
“Importantly, there are powerful tailwinds, including a vast array of new product launches across various sectors such as medical devices and pharmaceuticals. Long-term growth drivers are also very much intact with consolidation, prevention and emerging markets prime examples. The medium and long-term investment opportunity for healthcare, we believe, is compelling.”
If we are at ‘peak fear’, then this, coupled with resilient earnings growth, makes the healthcare sector’s 20% discount to the wider S&P 500 a very attractive entry point.
There is also plenty of innovation in the healthcare market. A research note from Janus Henderson says that many firms with breakthrough medical products that advance the standard of care for patients or address an unmet medical need have seen sizable returns so far this year. It also adds that 60 drugs are pending FDA review this year.
Another point is the resilience to what many have called ‘draconian’ policy pressures. For example, Medicaid provides health coverage to around 80 million low-income Americans. It received wider coverage from both Obamacare in 2010, and again in 2021.
The Congressional Budget Office (CBO) estimates that Trump’s recent bill will cause 10 million people to lose coverage by 2034. Prescription drugs account for roughly 6% of total Medicaid spending, meaning they will not be too big a headwind for pharma sales.
There is also hope that the widely reported 200% tariff headline is just a warning shot from Trump’s negotiation playbook to shift manufacturing capacity to the US. The likes of Eli Lilly, Johnson & Johnson and Roche and Novartis have already confirmed plans to spend $150bn capex in the US.
Do we need an inflexion point, or are valuations simply too good to ignore?
So, have we reached an inflexion point? Valuations look appealing and there are long-term tailwinds, while the hope is that aggressive policy pushes are tapered down to a degree. Orbis Global Balanced manager Alec Cutler says the opportunities from a valuation perspective have seen him move away from defence stocks towards healthcare.
He says: “If you take a significant number of growth managers’ top 10 holdings from two years ago, around a third of them would be healthcare names. We have looked closely at those healthcare names – some of which were down 60-70% from then – and we’ve found that they were right (to select them), but we had no interest in them at 3x the price.
“But now the valuations have fallen, as have the expectations. We’ve had this huge momentum of money coming out of healthcare as the growth managers have sold off. There has been pain for the likes of Untied Healthcare and Novo Nordisk (which has been pummelled despite the success of GLP-1s).
“What are the two most important parts of managing healthcare costs in the US? It would be the managed care organisations and the anti-obesity chemicals. Both have been hammered and are now a natural contrarian opportunity”, he adds.
Figures from Novo Nordisk highlight the long-term tailwinds from GLP-1 penetration of obesity drugs. They show that 764 million people globally have obesity, with only 15 million of these being seen by experts and only one million being treated with Wegovy by the end of 2023.
That number is likely to have risen since, but the penetration is likely to remain incredibly low. The opportunity is still there for a company that has fallen significantly in the past 12 months.
Healthcare is arguably the world’s biggest megatrend, with the ace up its sleeve being predictability. People are living longer, more people are getting access to healthcare and it continues to evolve thanks to the likes of artificial intelligence (AI).
It is traditionally a defensive asset, which is why current valuations could make it a very attractive entry point.
Those wanting to access the sector might consider the BNY Mellon Multi-Asset Balanced fund, which has an overweight to the sector (11%), as does the Liontrust Sustainable Future Global Growth fund (18.3%) and a UK offering like Schroder Income Growth fund (13.4%).
Darius McDermott, managing director of FundCalibre and Chelsea Financial Services. The views expressed above should not be taken as investment advice.