Specialist 

Fund Review: US headwinds threaten healthcare growth potential

Fund Review: US headwinds threaten healthcare growth potential
 Healthcare indices versus traditional stockmarkets

An ageing global population, combined with continuous developments in biotechnology and medical treatments, has seen healthcare become a growing area of interest for many UK investors.

Dani Saurymper, manager of the Axa Framlington Health fund, points out that at its core healthcare is a sector driven by science and innovation. 

“Company pipelines are strong, with the global healthcare industry seemingly on the cusp of another innovation wave driven by advances in genomics, robotics and diagnostic testing/imaging,” Mr Saurymper says. 

“The plummeting cost of sequencing technology has expanded our understanding of disease biology and led to the emergence of gene therapy and the promise of cures for diseases that were never thought possible. Digital health – the application of technology in the delivery and administration of care – is also an exciting area of development. Whether it be wearable technologies transmitting real-time data on a patient’s blood glucose levels, or the analysis of big data to identify patients at risk of a medical emergency, digital health looks to offer significant growth potential long term.”

Geoff Hsu, portfolio manager of The Biotech Growth Trust, says that new product launches, positive clinical data, and mergers and acquisitions (M&A) have historically been the main drivers of performance for the biotech sector, but the run-up to the US presidential election caused these stocks to suffer.

Mr Hsu noted that Donald Trump’s surprise election victory caused a brief relief rally for the sector, sending the Nasdaq Biotech index up 9 per cent on the day after the election. 

“The burgeoning rally was cut short in January 2017 when president Trump made comments suggesting he favoured having government negotiate drug prices more aggressively with manufacturers,” he adds. 

“As a result, there is still great uncertainty about what Mr Trump specifically intends to do with regards to drug pricing.”

Simon Clements, co-manager of the Liontrust Sustainable Investment team, notes healthcare was the best-performing sector globally for four straight years until 2016 –when it reversed substantially. 

“Overall, the sector remains controversial and divides opinion,” Mr Clements says. 

“It does grow above average and tends to be defensive, and both are attractive attributes. However, if the US system can’t afford to pay for the treatments that have been developed, are we risking future innovation by not rewarding those who innovate now?”

Ritu Vohora, investment director at M&G Investments, adds: “Two main themes from the key US market dominate the healthcare sector today: attempts to repeal and replace Obamacare, and US drug pricing concerns. Both triggered a derating of the sector last year, with many stocks trading at attractive valuations.

“Stocks paying steady dividends until the market prices their product pipeline, as well as those that could see M&A activity, are interesting areas to look at in 2017. 

“It is important to focus on the merits of individual stocks, those with resilient earnings and decent growth prospects, as variations in drug patents, pipelines and innovation cycles reinforce the need to be selective.”