• The AI boom lifted global equity markets to new highs in May, despite continued geopolitical unrest.
• The fund posted a positive month, gaining between 4.5 to 5.5 percent depending on currency and share class. The acquisition of the biotechnology company Esperion was welcomed by the fund.
• We see medium-term opportunities across all four healthcare subsectors, despite risks of volatility driven mainly by factors such as inflation, interest rates, monetary policies, the conflict in the Middle East and the mid-term elections.

MONTHLY COMMENT

Global equity markets once again reached new highs in May. The rise was primarily driven by the AI boom and strong earnings. The market’s perception that the economy had, up to that point, absorbed the increase in oil prices without major consequences for growth or inflation, also affected the rise. Earnings forecasts are improving, especially in the US, where profits are expected to increase by more than 20 percent in 2026.

Continued geopolitical unrest

The month was marked again by continued geopolitical unrest in the Middle East as a result of the closure of the Strait of Hormuz and the many questions surrounding Iran’s relationship with the rest of the world. Nevertheless, investors regained risk appetite through a prolonged ceasefire between the US and Iran, which has opened the way for some oil flows through the Strait of Hormuz. Oil prices fell sharply from their elevated levels, reflecting reduced concern about an imminent, acute energy crisis.

A new Fed chair at the helm

The new chairman of the US Federal Reserve, Kevin Warsh, delivered his first public speech in May. His primary emphasis was on reforming various aspects of the central bank. This may point to restraint on the question of rate cuts in the future. Changes in monetary policies, is not something a Fed chair can decide alone. At some point in the future, Warsh may seek to implement a broader shift in monetary policy by materially reducing the Fed’s bond holdings. This would be a challenging move and would likely require offsetting measures to prevent long-term yields from rising too sharply. In other words, the banking system would need stronger incentives to absorb a larger share of government debt. Increased rate volatility should therefore be viewed as a considerable risk.

The US two-year Treasury yield increased somewhat during the month, while the ten-year yield stabilized after first rising sharply and then retreating by almost as much. According to the market, the probability of further near-term rate cuts is now rather low. On the contrary, rate hikes cannot be ruled out after the midterm elections. The equity market has, to date, handled these potentially changed expectations notably well. The focus lies elsewhere, primarily on earnings growth in individual companies and hopes of stronger economic activity.

AI-related sectors at the top

The month was characterized by a continued strong focus on the technology sector, and in particular hardware suppliers within the AI segment. The world index rose 4.9 percent in euro terms, while the S&P 500 gained 5.6 percent. A US semiconductor index rose by almost 22 percent. Within healthcare, pharmaceutical and biotechnology companies stood out in particular.

REFLECTIONS

After a slow start to the year, the healthcare sector’s fundamentals can still be summarized as strong. Adjusted for managed care, select M&A-related write-downs (Merck) and unprofitable companies, earnings in the sector increased by just under 14 percent, which was in line with the development in global equity markets. Whether or not such adjustments ought to be made, we consider them to be relevant, not least because the earnings decline among insurers was heavily discounted and this subsector now appears to be recovering. We therefore believe that 14 percent in adjusted earnings growth is a meaningful reflection of the fundamentals currently enjoyed by companies in the healthcare sector.

The market for the healthcare sector has improved somewhat since the beginning of the year, but several conflicting forces are set against one another. On the one hand, there are signs of overheating in the technology sector, continued geopolitical unrest with oil prices in focus, and a global economy characterized by rising inflationary pressure. This, we think, could result in stagflation tendencies with rising rates and tighter monetary policy. On the other hand, many sectors are performing fundamentally surprisingly well or at least maintaining forward momentum despite high oil prices. Moreover, many company valuations have not risen materially, while earnings growth has increased in line with equity prices. Underlying demand among consumers is building and consolidating, while waiting for the broader economic outlook to become clearer. Thus, global growth could, we think, strengthen relatively quickly if the conflict in the Middle East were to be resolved. In summary, positive factors are largely offset by negatives, and equity markets’ performance are driven primarily by current and expected earnings growth.

Continued strong demand for healthcare

Healthcare stocks should, on average, be able to withstand a potential correction, especially large, profitable companies with good sales expectations in coming years. A sharp market decline, for instance due to stagflation tendencies, larger military conflicts, or an oil price shock are, particularly for smaller companies, however, difficult to hedge against, and none of these scenarios can be ruled out with any degree of certainty. Yet, demand for healthcare continues to rise in most economies, and medical progress remains very strong. The most likely outcome is therefore a continued recovery for the fund’s holdings. Indeed, the overall uncertainty cannot be ignored, we continue to focus on innovation-driven companies whose underlying strengths are largely insensitive to cyclical fluctuations. We see clearly-defined medium-term opportunities for strong equity price development across all four subsectors, despite risks of volatility driven mainly by external factors.