Bellevue Medtech & Services

The world stock market closed slightly lower overall (MSCI World Net Index -0.5%) but there was a relatively wide range of performance variation. US tech stocks gave up considerable ground (Nasdaq 100 -2.5%), whereas European blue chips (Euro Stoxx 50 +3.5%) and Germany’s bellwether index (Dax +3.8%) outperformed.

The latest news on the US economy (weak jobs data and falling consumer confidence) and Donald Trump’s threats to impose tariffs on imported goods from China, Canada and Mexico slowed Wall Street's previously strong run. We observed capital flows into defensive stocks and some signs of profit-taking. The sector rotation triggered in January by the Chinese company DeepSeek continued into February on news of its pending R2 AI model launch, as investors shifted more money flowed out of tech stocks and into healthcare (MSCI World Healthcare Net +1.3%) and other sectors. After their strong showing in January (+8.7%), the medtech sector (MSCI World Healthcare Equipment & Supplies Net -0.9%) and the Bellevue Medtech & Services Fund (-1.1%) performed in line with the world stock market in February. Bond yields drifted lower over the month, with 10-year US Treasurys falling 0.3% to 4.2%, a pleasing trend that should give equity valuations prolonged support, especially in high-growth sectors such as medical technology.

We already covered the issue of import tariffs in detail in our previous monthly fund reviews. Our position here was confirmed in our talks with company executives in February, namely that medtech companies 1) were not very vulnerable to tariffs, 2) could again expect tariff exemptions for their products, and 3) have a very similar production footprint, so any new tariffs would not necessarily change the competitive landscape because if new tariffs are indeed imposed, the likely general industry response will be to pass all additional costs through to the customer. 

Abbott (+8.1%), EssilorLuxottica (+8.0%), Penumbra (+7.2%) and Boston Scientific (+1.6%) made positive contributions to performance like in the previous month. Boston Scientific met high investor expectations, while Penumbra and Idexx (+3.8%) reported better-than-expected quarterly results. Align Technology (-14.5%), Becton Dickinson (-8.7%), Cooper (-6.2%) and Stryker (-1.1%) detracted from portfolio performance. Becton Dickinson’s quarterly results disappointed investors and the company also announced that it was planning to separate its biosciences and diagnostic solutions unit through a spin-off or other transaction, which is likely to weaken its earnings per share. In addition, the separation process will take some time and could lead to unexpected fluctuations in reported 2025 results. Align met investor expectations but currency translation had a highly negative impact. 

Our decision to keep the portfolio weighting of healthcare services very low despite very enticing valuations proved to be a wise one in the month under review. Humana (-7.6%) and UnitedHealth (-12.3%) traded lower after the Wall Street Journal published an article claiming that the US Justice Department was launching a new investigation into their Medicare Advantage billing practices. UnitedHealth issued a media release in response stating that it was not aware of any new investigations and that the company's billing practices were reviewed by the government on a regular basis. It also stated that the Department of Justice regularly conducts such reviews and has never found any evidence of misconduct at UnitedHealth. All performance data is in EUR / B shares.

In view of the very strong Q4 earnings announcements from medtech companies and their guidance for 2025 and based on our latest talks with company executives, we expect procedure volume growth rates will remain at high levels in 2025. The approval and subsequent launch of relevant new products will continue to bolster sales growth, too. Examples here are Abbott’s Lingo, Libre Rio, Libre 3, TriClip and AVEIR products, Boston Scientific’s Farapulse PFA system and Watchman FLX Pro device, and the new da Vinci 5 surgical robot from Intuitive Surgical. We expect sector pricing power to remain above historical levels in 2025, too. Margins should continue to widen thanks to the above-average sales growth and a wave of new product launches with high margins.

In the healthcare services space, we believe hospital operators, health tech companies and US health insurers have considerable upside potential. Hospitals should benefit from high patient volumes, higher prices, and only moderately higher personnel costs. We expect health insurers to report solid member growth and significantly higher profit margins in Medicare Advantage and Medicaid business lines. Continued high US Treasury yields could also have an accretive effect on earnings. Of greater importance for the performance of healthcare services stocks is whether the current cloud of uncertainty hanging over the industry will lift and more clarity about the long-term framework conditions will emerge after Donald Trump’s inauguration.

Meanwhile, there are already signs of a significant increase in M&A activity after the appointment of a business-friendly director for the US antitrust authority and that the large-cap companies will use their strong balance sheets to drive external growth. The currently attractive valuation levels are enticing from this angle too. The anticipated repositioning of investor assets out of stocks that made strong gains last year is yet another factor in favor of investing in the Bellevue Medtech & Services (Lux) fund.