Bellevue Medtech & Services

November was a very strong month for global stocks (MSCI World Net Index +7.5%), whereas European stocks (Euro Stoxx 50 -0.3%) and Germany’s bellwether index (Dax +2.9%) showed a subpar performance. This significant divergence can be traced to Donald Trump’s surprisingly clear-cut victory as the 47th president of the US. The Republican party not only captured the Senate but also kept its majority in the House. Donald Trump's “America First” policy weighed on the markets of the US’s major trading partners, while the shares of US tech and financial companies closed sharply higher.

But not every sector benefited. Trump's nomination of vaccine skeptic Robert F. Kennedy Jr. as the next US health secretary irritated Wall Street and had a negative impact on biotech and pharmaceutical stocks. The Bellevue Medtech & Services Fund (+6.8%) was expectedly resilient. It beat its benchmark – the global medical technology market (MSCI World Healthcare Equipment & Supplies Net +6.3%) – and clearly outperformed the wider healthcare universe tracked by the MSCI World Healthcare Net Index (+1.9%).

Innovative large-cap medical technology players with outstanding management such as Stryker (+13.1%), Boston Scientific (+10.9%), Intuitive Surgical (+10.6%), Edwards Lifesciences (+9.4%) and Abbott (+7.7%) were performance drivers. Trump’s nomination of Robert F. Kennedy Jr. as the next US health secretary reinforced medtech’s reputation as a safe haven. Medtech companies are also benefiting from the ongoing fast growth of surgical procedure volumes. Small-cap medtech names such as Globus Medical (+19.7%), Insulet (+18.4%), Align (+16.7%), Dexcom (+13.7%), Glaukos (+11.6%) 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. Globus Medical beat expectations too and reported record-high robot unit placements. Dexcom seems to be making good progress toward resolving its self-inflicted sales problems. The monthly returns of Becton Dickinson (-2.4%), GE Healthcare (-2.1%), Alcon (-0.6%) and Medtronic (-0.3%) were less pleasing.

The performance of US health insurers was mixed. Humana (+17.1%), UnitedHealth (+11.1%), Cigna (+10.3%) and Elevance (+3.1%) were performance drivers, while Molina (-4.7%) and Centene (-0.9%) were underperformers. Humana and UnitedHealth both specialize in Medicare Advantage plans (MA) for people 65 and older and their share prices rose after Trump won because he had promoted 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. In the longer term, this could also pose a problem for hospital chain HCA Healthcare (-6.2%) in the form of unpaid bills for healthcare services provided. Cigna was marked up on the news that it was not pursuing the acquisition of Humana. All performance data is in EUR / B shares.

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.

Hospitals stand to 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 and premium rate increases. 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.

Unlike in 2023, we are anticipating tailwinds for our investment solution in 2024: Rate cuts by the Fed, attractive valuation levels (valued at a discount despite above-average earnings growth), a general repositioning as investors drop last year's outperformers and move into high-quality stocks, and a meager outlook for global economic growth (which in the past has been good for non-cyclical sectors). All of these factors argue for an investment in the Bellevue Medtech & Services (Lux) Fund.