In terms of near-term sentiment within healthcare, there is optimism towards the more defensive areas. Favoured defensive areas include large-cap pharmaceuticals and large-cap biotechnology, which as a collective have strong balance sheets, good cashflow conversion and, where applicable, secure dividend yields. Areas where sentiment collapsed during March include medical devices and healthcare facilities due to the delays in non-urgent procedures at hospitals. Small and mid-caps were also hit hard due to perceived higher risk.

On a one and three-year view, areas hit hardest with the worst sentiment offer compelling returns. Assuming some kind of resumption to normality over those timeframes, medical devices, healthcare facilities and small/mid-cap stocks in areas such as biotech screen as highly compelling.

Looking at select healthcare subsectors and the implications of COVID-19:

Pharma and biotech: With no significant supply-chain issues at this point in time, pharma and large-cap biotech companies should be able to display defensive, operational characteristics through the COVID-19 crisis. Patients who require lifesaving medications will likely find a way of getting what they need. Indeed, in the very short term there could be an increase in volumes as physicians write prescriptions for longer periods, saving patients travel time and minimising the time they have to be away from home. If true, this trend could reveal itself during the Q1 2020 earnings season for the drug manufacturers and distributors who have been stockpiling. A couple of notes of caution, however. First, new drug launches may be temporarily disrupted with sales reps sitting at home instead of interacting with prescribing physicians; second, clinical trials will be disrupted if trial sites become inaccessible and/or patient recruitment becomes challenging.

Medical devices: The near-term implications are material in that elective or non-urgent procedures are being postponed or cancelled, freeing up much-needed capacity for COVID-19 patients. Further, healthcare facilities’ attitudes towards capital expenditure may be altered in the near term given they are also coming under COVID-19-related pressure. The big question is one of the depth and length of the trough given H1 2020, and indeed FY20, will clearly be challenged. It is worth noting that several medical device companies have pulled Q1 2020 and FY20 financial guidance. There is absolutely no doubt that the demand for services will resume; it is the shape of the recovery curve that is uncertain.

Managed care: This is a fascinating subsector right now. The political backdrop has been very supportive, and the near-term sales and earnings trajectories should be reasonably secure given postponed or cancelled elective procedures could ease medical cost trends. On the flipside, however, the cost of treating a severe COVID-19 patient could be material and rising US unemployment is also a challenge, especially for those with more exposure to the commercial market. One thing to note is the industry has been quick to offer COVID-19-related support to its members, whether it be waiving cost-sharing, providing post-discharge support or relaxing the rules around prescription refills. Also, and seemingly forgotten for healthcare, has been the positive news on the political front with Joe Biden now effectively the chosen candidate for the Democrats to challenge President Trump with his main competitor, Bernie Sanders, having dropped out of the race. Biden, if he wins, is likely to support and build on Obamacare which is a system that investors understand. This lifts an important overhang going into the US presidential election in November and the outlook from there.

Life sciences and tools: This subsector is exposed to China and stocks have struggled year to date given the lack of activity in China during early 2020. We understand that economic activity in China is rebounding already, a clear positive, but the impact of COVID-19 has spread west, leading to further social and economic lockdowns in Europe and North America. There is little visibility right now, especially with the more cyclical end markets, and also on the capital equipment side (accelerate, defer or cancel capital equipment purchases?). On a more positive note, some do have exposure to COVID-19 testing but the challenge there is one of scale and commercial sustainability.

Facilities and hospitals: This is where we have seen the greatest volatility. Why? With high fixed cost bases, the potential impact of cancelled elective surgeries is material. Further, as an industry, the companies tend to carry quite high levels of debt which is creating some nervousness. In that context, it is worth noting that the CARES Act increased funding for the Public Health and Social Services Emergency Fund by $100bn in order to reimburse eligible healthcare providers for healthcare-related expenses or lost revenues that are attributable to COVID-19. Indeed, the American Hospital Association recently sent a letter urging the government bodies, HHS and CMS, to distribute $23bn directly to the providers to help manage the crisis.