Market and sector review
Global equity markets continued to march higher in September, driven by a strong performance in cyclical areas of the market such as consumer discretionary, materials and industrials, and by a sustained rally in utility stocks. Given the risk-on attitude of investors, it is not a surprise that healthcare lagged the overall market in the month.
Within healthcare, the best performing subsectors were healthcare information technology, healthcare supplies, healthcare services, and life sciences tools and services; on the other hand, healthcare distributors, pharmaceuticals, biotechnology and managed care had a more challenging month.
The long-awaited first rate cut from the US Federal Reserve finally materialised in mid-September, putting an end to the rate hike cycle that started in March 2022. The big debate in the market was about the size of the first cut but most were expecting a 25 basis points decrease. Therefore, when the decision was made to reduce the benchmark rate by half a percentage point, the equity market reacted positively, with smaller caps and economically sensitive sectors moving higher. The start of a more accommodative monetary policy points to the fact that the Fed is taking the battle to inflation which is on track to subside closer to the 2% target, and it has shifted its focus instead to employment and future economic growth. On these two fronts, data is still relatively encouraging: unemployment appears to be stable and economic growth has been robust, with the Gross Domestic Index and Real Disposable Income statistics being revised up significantly thereby painting a much healthier picture for the US consumer.
More positive macroeconomic news also came from China where the government announced a sweeping set of policies and stimulus measures to help prop up the economy and, more specifically, Chinese consumers. It is clear that Chinese authorities are acutely aware of the financial challenges their nation has been facing and are prepared to take firm actions to try to rekindle positive sparks in a beleaguered economy. Whether these actions have a long-term meaningful impact on China’s economy and are enough to support growth in the years to come and not just in the short term remains to be seen. For now, the market is taking these decisions positively, with domestic and international stocks with Chinese exposure rebounding significantly from their recent lows.
Fund performance
The Company’s NAV was down 5.1% in September, behind its benchmark, the MSCI All Country World Daily Net Total Return Health Care Index, which was down 4.7% (in sterling terms).
The main positive contributors in September relative to the benchmark were Insulet, AstraZeneca* and Medley.
Insulet’s strong performance reflects increasing enthusiasm for the growth trajectory for the company’s insulin pump, Omnipod5, with the opportunity in Type II diabetes particularly exciting.
The weakness in AstraZeneca’s* share price was driven by disappointing clinical data from its oncology portfolio.
We continue to be constructive on the healthcare sector, a view driven by strong innovation cycles, elevated patient volumes and an ageing demographic
Medley performed strongly on the back of enthusiasm for its US business opportunities.
Negative contributors in the period under review were Acadia Healthcare, Amvis Holdings and NovoNordisk.
Acadia Healthcare sold off heavily following the news that the company received a voluntary request for information from the US Attorney’s Office for the Southern District of New York as well as a grand jury subpoena from the United States District Court for the Western District of Missouri related to its admissions, length of stay and billing practices. In addition, Lakeland Hospital Acquisition, a subsidiary of Acadia Healthcare, also received a grand jury subpoena from the Western District of Missouri on the same day regarding similar subject matter.
Amvis Holdings struggled in September even though there was no news concerning the stock which was perhaps caught in the general weakness of small-cap Japanese companies.
Recent portfolio addition NovoNordisk wrestled with the market appearing to focus on ongoing supply constraints for key growth driver Wegovy, indicated for the treatment of obesity. Demand continues to outstrip supply but it is the manufacturing bottleneck that is causing near-term concern.
We initiated positions in Stevanato Group and Vaxcyte during the month.
Stevanato Group is a contract manufacturer that we believe is exiting a period of depressed revenues due to industry-wide destocking for vials used for injectable medications. With expectations now rebased, a return to a more normal operating environment coupled with good execution should yield an inflexion in top and bottom-line growth that is not captured in the current valuation.
US-based biotechnology company Vaxcyte focusses on vaccines with the most advanced assets for invasive pneumococcal disease. Recently disclosed clinical data points to the potential for a best-in-class asset, with the broadest overage, in a multi-billion dollar market. The new positions were funded via the sale of Stryker.
Outlook
We continue to be constructive on the healthcare sector, a view driven by strong innovation cycles, elevated patient volumes and an ageing demographic that is developing more and more chronic diseases that need medical attention. With valuations attractive for the potential growth on offer, moving beyond the US election could be the near-term catalyst for a period of outperformance.
* not held
