The US election is the “biggest fundamental driver” of negative sentiment in the healthcare sector, AXA Framlington Health fund manager Dani Saurymper told Morningstar. Candidates of both parties are currently chasing votes by suggesting healthcare reforms, adding a healthcare cost pressure and uncertainty.
The healthcare industry is facing growing cost pressure as the US politicians chased votes by suggesting more price control in drugs and attacking drug price gouging, according to Saurymper.
Drug pricing became a target in the political debates following public outcry over the case of Martin Shkreli and his company Turing Pharmaceuticals, which raised the price of a drug often given to cancer and AIDs patients.
Any outcome of the US presidential election could affect valuations of healthcare stocks; in the past eight years healthcare reform introduced by US President Barack Obama has driven significant growth in the sector. The US now spends 18% of GDP on healthcare.
Healthcare investors also need to be aware another factor currently affecting the valuation of the industry; a massive rotation out of healthcare stocks into underperformed areas of the market, particularly cheap energy and mining stocks.
Ageing Population, Innovation and Emerging Markets
Despite the political noise and market rotation, Saurymper said that underlying demand in the healthcare sector was still robust, predicting that healthcare as a proportion of GDP in the US would increase to 20% from 18% over time.
“There are clearly needs to be some form of reign on spending, and in fact most of the policies talk about reducing the rate of healthcare spend growth but not depressing growth, so instead of being high single-digit price growth, it might be only a 5% price growth,” Saurymper commented.
Tailwinds to the sector are strong; the US has an ageing population and an increasing frequency of lifestyle diseases such as obesity and diabetes. Saurymper also sees more innovative drugs coming to the market that address new medical needs. Last year 45 drugs were approved by the regulator the US Food and Drug Administration, a record high in the last 16 years, providing a hope to further growth within the sector.
He also saw opportunities in emerging markets as consumers become wealthier. China, for example, currently spending 4-5% GDP on healthcare, was expected to develop further healthcare spending based on its ambition to establish a $1.2 trillion healthcare system by the end of the decade.
No Fear from Biotech Selloff
Concerns raised over the recent volatility in biotech stocks do not worry Saurymper, who reminded investors that biotech only accounts for 15% of the MSCI World Healthcare Index, while large pharmaceutical companies accounts for 40% of the index.
“Large caps are clearly pocket of strength,” Saurymper said, as large-cap pharmaceutical names were very much of “safe havens” to investors. Medical device and healthcare services sectors were very resilient as well, he said, and together these sub-sectors should fare better.
3 Stocks with Growth Potential
Saurymper also shared three healthcare stock picks in which he saw growth potential. GlaxoSmithKline (GSK) was the one of the stock picks, a traditional large company in the pharmaceutical industry. The stock is rated as a fair value stock by Morningstar analysts.
Saurymper also suggested new themes in healthcare investing, moving away from traditional large caps to more innovative technology. Digital health company, DexCom Inc (DXCM) and biotech firm Celgene (CELG) were his two other choices.
