Market and sector review
The new year started favourably for global equity markets, with data continuing to point to a resilient US economy. The view that the new US administration’s agenda should be supportive for businesses drove a risk-on investment environment. The communication services and finance sectors continued to perform strongly, thanks to robust corporate earnings, while information technology struggled after it emerged that a Chinese company managed to develop a much cheaper AI model than those from US technology giants.
Counterintuitively, healthcare was the second-best performing sector in the month, perhaps helped by the rotation away from stocks that were seen as beneficiaries of AI-driven capital investments. Within healthcare, healthcare information technology, services and equipment saw strong returns in the month, while pharmaceuticals, biotechnology and supplies lagged the broader healthcare index.
Healthcare was the second-best performing sector in the month, perhaps helped by the rotation away from stocks that were seen as beneficiaries of AI-driven capital investments.
Early in January, we attended the JP Morgan Global Healthcare Conference in San Francisco which gave us the opportunity to interact with a large number of companies. From the various conversations, it was clear that healthcare remains out-of-favour for a number of reasons including resilient macroeconomic prospects, underwhelming 2024 earnings, a lack of M&A activity and political uncertainty. It was the latter topic that received the most interest during the discussions at the conference, with the key question being what the impact of the new US administration will be on the sector. Investors’ attention was firmly on the possible consequences of sweeping tariffs on China and other markets, cuts to government-sponsored research budgets, drug-pricing reform and the upcoming change in leadership at the US Department of Health and Human Services. Despite these concerns, we came away with conviction in the strength of the sector’s fundamentals: heightened healthcare utilisation post-pandemic is seen as a durable trend thanks to demographics and patient activity, the demand for solutions to tackle unmet medical needs remains high and the industry’s innovation engine continues to deliver positive outcomes.
Fund performance
The Company’s NAV increased 6.5% in January, behind its benchmark, the MSCI All Country World Daily Net Total Return Health Care Index, which was up 7.0% for the month.
Positive contributors relative to the benchmark in January were Merck Group, Sandoz Group and Danaher.
The Fund benefitted from owning neither Merck Group nor Danaher, with the former struggling due to concerns about the near-term commercial potential for the company’s vaccines franchise in China. Danaher’s disappointing performance in the month was a result of lower than anticipated guidance for FY25, with the company’s diagnostics division the primary drag. There was no thesis-changing news for Sandoz Group in January with the company appearing to benefit from increasing enthusiasm for its biosimilar portfolio, especially in the US.
Negative contributors in the month were Terumo, AbbVie and UCB.
There was no news during the period for Japanese medical device company Terumo although we do note that a number of Japanese companies have had a challenging start to 2025. AbbVie was a case of investment timing, having exited the position just before a robust set of FY24 results and encouraging FY25 guidance. There was no news for UCB in January, possibly suffering from profit-taking after a very strong 2024.
We added positions in Abbott Laboratories and Globus Medical.
Abbott Laboratories disclosed strong FY24 financial results and a positive outlook for 2025 underpinned by a broad set of growth drivers. Coupled with an attractive valuation, its risk/reward feels skewed to the positive. Globus Medical is a medical device company with a specialisation in the field of musculoskeletal implants. Operating in an area of medicine where penetration is low, its portfolio should drive attractive top-line growth, with good cost control and deal synergies driving faster profit growth. The positions were funded by exits from AbbVie, Legend Biotech and RxSight.
Outlook
Healthcare has had a strong start to the year, in both absolute and relative terms, with a solid start to earnings season offering near-term confidence in the industry’s fundamentals. US politics may well generate headlines that create short-term volatility that could present interesting, medium-term investment opportunities.
