Bellevue Medtech & Services (CH)

The US economy continued to stabilize in November, as many investors had expected. The Federal Reserve met expectations too when it announced its second consecutive rate cut, albeit this time by 0.25%. The big event in November for investors, however, was the somewhat surprising election of Donald Trump as the 47th president of the US. What’s more, Republicans won a majority in both the Senate and the House of Representatives.

This news triggered a strong rally in global stocks (+6.5%), led by tech stocks and financials. The broader healthcare segment (+0.9%) was clearly weaker. Trump's nomination of vaccine skeptic Robert F. Kennedy Jr. as the next US health secretary weighed on both biotech and pharmaceutical stocks. The Bellevue Medtech & Services Fund (+7.6%) proved to be resilient and outperformed both the broad healthcare sector and its benchmark (+6.7%). Healthcare services contributed 3.7% to the fund's performance and medtech stocks 3.9%.

McKesson (+27.8%), a US pharmaceutical wholesaler, and Veeva Systems (+11.1%), a leading provider of cloud-based software solutions for more efficient drug marketing and drug discovery processes, made positive contributions to the portfolio’s absolute performance. McKesson reported interim results that beat investors’ low expectations and management raised its earnings guidance for the full year. At its capital markets day, Veeva surprised investors with its new target of USD 6 bn in sales in 2030.

Shares of US health insurers delivered mixed returns. Humana (+17.1%), UnitedHealth (+10.1%), Cigna (+9.3%) and Elevance (+2.1%) were performance drivers, while Molina (-5.6%) and Centene (-1.9%) detracted from performance. Humana and UnitedHealth specialize in Medicare Advantage (MA) plans for people 65 and older and their share prices rose after Trump won because he had been an advocate of the MA program during his first term. Molina and Centene, which specialize in Medicaid health insurance plans for low-income people, came under pressure after the Republican sweep of the elections because the party has said federal funding of Medicaid must be reduced. Cigna announced that it is not pursuing a merger with Humana after all.

Innovative large-cap medical technology companies with outstanding management teams, Stryker (+12.1%), Boston Scientific (+9.9%), Intuitive Surgical (+9.5%) and Abbott (+6.7%) for example, made positive contributions to performance. Trump’s nomination of Robert F. Kennedy Jr. as the next US health secretary reinforced medtech’s reputation as a safe haven. In addition, medtech companies are profiting from the sustained sharp upturn in surgical procedure volumes.

Small-cap medtech companies such as Insulet (+17.3%), Dexcom (+12.7%) and Penumbra (+8.6%) also made positive contributions to performance. Insulet beat the consensus sales forecast for the third quarter and increased its sales guidance for 2024 as a whole.

Life sciences tools specialists Thermo Fisher (-1.3%) and Danaher (-0.6%) showed slightly negative returns. That reflected the uncertain outlook for pharma and biotech companies, which are their biggest customers.

All performance data is in CHF; AA shares.

In the healthcare services space, we see substantial upside potential in US hospital and health insurance stocks. Hospitals will benefit from high patient volumes, higher prices, and only moderately higher labor costs. We expect health insurers to report rising premium income in the wake of solid membership growth as well as premium growth. Persisting high US government bond yields could have an accretive effect on earnings, too. Political risks are still low. We assume that the elections in November will not give either party a solid majority of seats in either chamber.

In their talks with investors in March, the executives of many medical technology companies expressed positive views about the course of business during the first quarter and said that they expected fast growth in surgical procedure volumes in 2024. The approval and subsequent launch of relevant new products will continue to bolster sales growth, too. Examples here are Abbott’s TriClip, AVEIR and Libre products, Boston Scientific’s Farapulse PFA system and the new da Vinci 5 surgical robot from Intuitive Surgical. We believe company pricing power in the low single-digit percentage range is still intact. Margins are expected to widen due to the faster-than-average sales growth and further improvements in supply chains.

Economic growth could slow during the course of 2024. Medical technology and healthcare services companies tend to outperform in a weaker environment.