• The war in the Middle East dominated the month of March, both in terms of the news flows and the movements on the equity markets. Interest rates rose during the month, reflecting a market that increasingly questioned the likelihood of near-term rate cuts.
• Diversification, quality, stable growth, and companies with products that address important medical needs remain key guiding principles as we look ahead.

Monthly comment

The war in the Middle East dominated the month in terms of news flows as well as equity market movements. The S&P 500 was close to entering correction territory, meaning a level 10 percent below its peak reached at the end of 2025. The VIX index, which measures market expectations for future volatility, rose above 30, a level that is often, somewhat arbitrarily, interpreted as signaling an “oversold” market. The healthcare sector was unable to withstand the broader market pressure and declined by 6.4 percent measured in EUR. The global equity index, MSCI World, fared somewhat better, declining by 4.3 percent.

Iran’s resilience underestimated

As the month progressed, it became increasingly apparent that the US had underestimated Iran’s aggressiveness toward its neighboring countries, as well as its ability to quickly and easily block the Strait of Hormuz. Iran managed to block the strait without resorting to much more than threats of mines and limited attacks on individual vessels anchored in the Gulf. Over time, it also became clear that Iran’s missiles and drones were significantly more precise than previously assumed, both in terms of target selection and their ability to actually hit those targets. This was likely facilitated by support from China and/or Russia, including equipment, information and intelligence sharing. It further indicated that the conflict was not asymmetric with a clearly dominant US on one side and a much weaker Iran on the other.

Furthermore, even relatively small, limited tactical counterattacks created significant operational challenges for the US which, if repeated, could, over time, affect the military superiority and endurance of the US. The deployment of US defensive missiles reached record levels during the month, and Iran’s attacks on US bases in the Gulf region were a source of real concern. The loss of a costly, strategically important communications and reconnaissance aircraft was not only symbolically significant, but also constituted a tangible tactical setback for the US.

On the political front, March was characterized by a series of threatening statements from both sides, many of which contradicted their earlier positions. On the final day of the month, it appeared that President Trump could consider exiting the conflict without the reopening of the strait, while Iran’s president indicated a willingness to enter talks and negotiations, provided the US offered assurances that the conflict would not reignite. The response from the Gulf states was not made public, but their stance will probably be important for any such process to succeed. The central issue remained the Strait of Hormuz and, more specifically, whether Iran should be able to impose tolls on traffic passing through the strait. History, after all, is full of tolls.

Macro and market uncertainty pushed interest rates higher

During March, interest rates rose sharply although they fell back somewhat on the final day of the month. The US two-year Treasury yield rose by almost 60 basis points at its peak, reflecting the market’s declining confidence in future rate cuts. These rate increases, driven both by inflation expectations and by rising risk premia across asset classes, helped explain why forward-looking growth companies such as pharmaceutical stocks declined, despite the fact that recession risk would normally be expected to favor such companies relative to others. An additional factor was likely profit-taking, as large pharmaceutical companies performed well earlier in the year.

Reflections

Comments from President Trump suggesting that the US could end the conflict with Iran within two to three weeks, together with indications from Iran’s president that Iran could consider ending the war if provided with guarantees that it would not reignite, were interpreted by the market as signs that both parties were moving closer to the negotiating table.

We share this interpretation, although the situation remains difficult to assess. It is hard to see that any country involved in the conflict, or indeed any country globally, genuinely desires a prolonged war, with the possible exception of Russia and certain other oil-producing countries that are independent of the Strait of Hormuz and who would benefit from higher oil prices.

The probability of an end to the conflict is perhaps best reflected in the development of oil prices, which at month-end may have reached a temporary peak, assuming that the political signals at the end of March contained more substance than general diplomatic goodwill and positioning.

High-quality companies in focus

In an equity market characterized by renewed optimism, stocks that have been most adversely affected by the conflict are likely to recover most rapidly in the short term. Companies that have faced negative, company-specific developments unrelated to the conflict, or product development issues are likely to find recovery more challenging.

Within our sector, the market continues to focus on quality in a broad sense, including companies with pricing power, sales momentum, and strong resilience in an environment that remains uncertain, as well as companies with solid development capabilities over both the short and long term. We continue to prioritize these characteristics in our selection process.

During the month, we reduced exposure to companies with weaker prospects for near-term recovery, whether due to short-term operational uncertainties or because potential positive news lies further into the future. This is easier said than done, as share prices often reflect these factors in advance. However, during recovery phases following market corrections, momentum tends to outweigh valuation.

Almost all major macroeconomic events over the past century have ultimately provided attractive opportunities to invest in high-quality companies at discounted valuations. We continue to view short- and medium-term risks with this in mind. A high degree of diversification, high quality across portfolio holdings, stable growth prospects, and companies with products that address significant medical needs remain core principles in our ongoing selection process.

This approach applies equally to our large, mid-sized, and smaller holdings. We have already seen four acquisitions of portfolio companies so far this year, and we continue to expect further consolidation within the sector. Among our smaller holdings, we currently see around thirty attractive companies with the potential to be acquired over time. When oil- and gas markets open up, fundamentals of our holdings in growth stocks should be even more appreciated.