SUMMARY

For the healthcare sector, the strong market in January was largely a reversal of the weak performance in December. US politics continued to shape the market as a whole, with ”Trump trades” gaining even more traction at the expense of other investment themes. In the healthcare sector, some of the high-level uncertainties in December diminished somewhat in January, largely due to the strong start to the earnings season and greater clarity regarding the scope of upcoming US healthcare regulations.

MONTHLY COMMENT

Equity markets began the year on a positive trajectory, with all sectors except technology closing in positive territory. As the market broadened, many of last year’s losers became January’s winners. The healthcare sector was the second-best performer among all sectors. This was exemplified by the broad healthcare index XLV, which ended 6 percent up in EUR (compared to the S&P 500 Index which was up 2 percent), marking its strongest month since 2013.

For the healthcare sector, the year commenced with the investor community gathering in San Francisco for their largest healthcare conference of the year. The overall sentiment was optimistic. Investors viewed Trump’s pro-business stance favorably, and major pharmaceutical companies expressed confidence that earnings would be only moderately impacted by the new pricing regulations within the US government healthcare program, Medicare. Furthermore, the earnings season opened strongly for the healthcare sector with several companies reiterating high quality revenue guidance driven by key product launches.

US politics with global implications

The Trump administration continued its efforts to jump start its reform of the US government. This included further proposals to significantly reduce the federal workforce, with Musk’s new efficiency department, DOGE (Department of Government Efficiency), playing a crucial role in identifying redundant areas. Budget cuts in the healthcare sector remained a recurring theme, as they were in the previous month. However, we noted a softened rhetoric regarding the extent of proposed healthcare regulations including drug price negotiations.

Several of Trump’s appointments were approved by the Senate in January, including the former hedge fund manager, Scott Bessent, as Secretary of the Treasury. Bessent’s nomination last fall was seen as a positive signal for the market, and investors now await his impact on economic policies. The most significant ongoing nomination for the healthcare sector, however, was that of Robert F. Kennedy Jr. (RFK Jr.) for the position of Secretary of Health and Human Services. During the Senate hearings, heated questions were raised about his incorrect claims linking vaccines to autism. RFK Jr. responded evasively to vaccine-related questions and instead attempted to highlight the issues surrounding ultra-processed food as a driver of major chronic diseases.

During the final hours of January, Trump also announced plans to impose tariffs on China, Mexico, Canada and the EU, with a starting date set for March 1st – an announcement that sparked volatility across global equity markets. Other noteworthy events with global implications were the Trump administration’s announcements to withdraw from both the Paris Agreement and the World Health Organization (WHO).

The Fed paused further rate cuts

Following three consecutive interest rate cuts by the Federal Reserve, no further cut was made in January. Chairman Powell had already, in December, signaled a hawkish stance, and in his forward-looking comments in January’s Fed meeting, he also expressed reluctance to push for further cuts given the unexpectedly strong labor market and uncertainties surrounding the scope and impact of the new Trump administration’s extensive budget and policy plans.

However, the pause in rate cuts had only a marginal impact on the healthcare sector, except for interest-sensitive biotech companies in early development phases.

REFLECTIONS FROM THE MANAGERS

Market breadth is back. As a sector specialist, we welcomed the rotation seen in January, and believe we speak for many when we say that the stock market’s fixation on the tech sector had reached a somewhat unhealthy level. In fact, the rotation into healthcare equities during January was one of the strongest we have ever seen. The most discernible trend was that investors rotated out of tech stocks and into financials and healthcare. According to data from Bank of America, the third week of January saw the largest net inflow to healthcare equities since 2008. Digging deeper, the inflow to Exchange Traded Funds (ETFs) was the lowest in the healthcare sector, which could signal that institutional investors were more interested in stock-specific exposure and that long-only interest in the sector was beginning to pick up. An exciting starting point for a healthcare specialist, to say the least.

The inflows continued towards the last week of the month, and we hope that this is the first sign that the relatively low allocation towards the healthcare sector (approximately one standard deviation below the historical average, in other words one-third less) has bottomed out and that we are at the beginning of a new bull market.

Politics is the art of the possible

Trump is expected to have a more business-friendly approach than his predecessor, particularly with regard to deregulation and anti-trust legislation. Corporate executives are looking forward to this, and the fact of the matter is that pharmaceutical companies are standing in front of the largest patent cliff in history. In the coming five years, $180 billion worth of revenue will lose exclusivity. This creates an urgent need to acquire smaller biotech companies, as the internal R&D engines of pharmaceutical companies often only get them so far.

With that said, Trump is unpredictable. The market was painfully reminded of this towards the end of January when he proposed new tariffs on China, the EU, Mexico and Canda. Moreover, the administration’s Office of Management and Budget (OMB) suddenly, and possibly unconstitutionally, decided to freeze approximately $3 trillion in federal grants. This created significant turmoil and uncertainty, not only limited to federally-subsidized healthcare programs. Before the order could take effect, however, it was temporarily blocked by a federal judge in Washington, D.C. This is likely not the last time we will be reminded of Trump’s unpredictability and sudden actions.

In other news, the House budget committee presented a smorgasbord of cost-cutting options to curb the large budget deficit. The healthcare sector is not exempt from this list. The majority of the proposals focused on Medicaid while Medicare was largely spared. Additionally, Medicare enjoys explicit support from both Trump and his nominee for Secretary of Health, Robert F. Kennedy Jr.

Continuing a systematic approach to identify tomorrow’s winners

A strong start is no guarantee for a good year. For now, optimism is however well anchored in earnings, the regulatory environment (which remains intact for the time being), and macroeconomic data. Additionally, valuations remain attractive, albeit at slightly higher levels than a month ago, both on an absolute and relative basis. In fact, only once before during the past three decades have healthcare stocks been so attractive relative to the broader market.

The earnings season is underway, and so far, companies have generally delivered better-than-expected reports. The results have been characterized by high production volumes, and healthcare companies have on average delivered earnings 2 percent above analysts’ consensus estimates. This is largely thanks to the strong underlying demand for healthcare, driven by improved access, increased healthcare productivity, and new diagnostic tools that detect diseases – especially cancer – at earlier stages.

We are encouraged by the strong momentum and continue our systematic approach to identify tomorrow’s winners while continuously balancing risk and reward. We believe the strong, broad rally in January bodes well for the year ahead.