• Central banks in the US, Europe and Japan raised interest rates in September – defensive stocks held up better.
• The fund declined during the month, driven mainly by medical technology and healthcare services.
• Interest rates, the US midterm elections and AI dominate the near-term picture. We look forward to several exciting healthcare sector events in October.

Portfolio Manager, Hugo Schmidt

Monthly comment

September has historically been a weak month for equities. Fiscal year-ends among US equity funds and tax considerations are often cited as reasons for this pattern. The healthcare sector was slightly negative in September this year, and these factors may well have played a part. The market’s focus during the month was mainly on geopolitics, rate hikes and AI, which left healthcare, among other sectors, out of the spotlight.

The Federal Reserve unanimously decided to raise its policy rate by 25 basis points to a reference rate of 3.875 percent. This was the first rate hike since July 2023. The US 10-year Treasury yield, an important gauge of the cost of money over time, rose by just over 50 basis points during the month to 5.273 percent. The Bank of Japan and the European Central Bank also raised policy rates during the month.

A higher discount rate weighs on the value of long-duration equities, in other words companies with a large share of their earnings far into the future. Biotech and medtech were therefore the worst-performing subsectors within healthcare. Larger defensive companies, particularly in pharmaceuticals, held up better.

Not entirely without news

We would describe the September sector conferences as somewhat less eventful than usual. Sometimes no news is good news. That was not the case for Novo Nordisk and Novartis, however. Novo’s shares fell after the growth outlook it presented at its capital markets day fell short of market expectations. The message from management was received as ”too little, too late” by the market. Novartis’ shares came under pressure after negative cardiovascular trial data for its inhibitor of lipoprotein(a), Lp(a), a lipid particle. Whether the problem lies with the drug itself or with the concept of Lp(a) lowering as a whole cannot be determined until more detailed data are available. Other pharmaceutical companies are studying candidates that achieve even greater Lp(a) reduction.

Utilization remains stable

Another theme from the September conferences was healthcare utilization and insurance coverage. This year’s large cuts in subsidies to the Individual Exchanges and next year’s cuts to federal Medicaid funding are expected to raise the US uninsured rate from around 8 percent to 10 percent by the end of 2027^[1]. The latest data points, however, indicate stable utilization at historically high levels.

AI in healthcare

There are signs that the equity market has started to pay more attention to AI as an investment theme within healthcare. Somewhat frustratingly, the market has treated the sector as the opposite of AI this year. We are now beginning to see stronger correlations between AI-related stocks and stocks in areas such as liquid biopsy, single-cell analysis, DNA sequencing and genomics.

It should be noted that AI-related demand is still at a relatively early stage for most healthcare companies. At the same time, two leading players, OpenAI and Anthropic, are showing strong interest in the healthcare sector. This further challenges the market narrative that healthcare is the “anti-AI trade”.

Reflections

The US midterm elections take place in early November. All 435 seats in the House of Representatives are up for election, while 35 of the 100 Senate seats are being contested this time. The Democrats have momentum in recent polls, and prediction markets put the probability that they take control of both chambers at just over 60 percent.

The Democrats’ stated priorities are to reinstate the enhanced subsidies on the Individual Exchanges and to roll back the federal Medicaid cuts. A Democratic ”sweep” would not necessarily mean the campaign promises are fulfilled, since the President holds veto power and negotiations may require concessions.

The midterms will set the tone for the presidential primaries, with campaigning set to begin next year. Some races are good examples of ”proxy races” that will indicate whether more or less centrist candidates are performing well. These include the Senate races in Michigan and Texas and the race for California’s 22nd congressional district.

Are high rates necessarily a problem?

Long-term US bond yields continued to rise in September. The 10-year yield is now at its highest level since 2007. One possible explanation is that the bond market is finally pricing in faster economic growth, driven by AI investment and tax cuts. Historically, long-term yields have tracked nominal economic growth. Today’s levels can therefore be seen as a normalization rather than a sign that something is wrong.

However, rising long-term yields have other drivers besides economic growth. Rising inflation expectations, not least because of higher oil prices, and growing government borrowing needs can push yields higher even if the growth outlook is unchanged. The higher yields are most likely the result of a combination of all these factors.

The pharmaceutical sub-sector, with its defensive qualities, should be well positioned to outperform the market if higher rates persist. Several leading equity strategists who believe in ”higher for longer” therefore highlight healthcare as attractive.

We are increasingly selective in the portfolio

Since the August peak, an equal-weighted world index has underperformed the standard market-cap-weighted index by five percentage points.^[2] In other words, the market continues to be driven by a handful of names in a handful of sectors. This trend may well continue through the final months of the year because of tax-loss harvesting. The fund has reduced its number of positions somewhat to be even more selective in this environment.

There are plenty of catalysts that could renew interest in the healthcare sector as we leave September behind. Events we look forward to in October include updated quality ratings for health insurers, new clinical trial readouts and quarterly earnings.

^[1] Source: CBO, Federal Subsidies for Health Insurance, 2026 to 2036

^[2] Source: Bloomberg, per 30 September 2026