Monthly update – July 2024

Stock markets increased slightly in July with the world index up 1.7 percent, measured in US dollars. A significant rotation from former stock market winners, mainly in technology, to value stocks and smaller companies was an important phenomenon during the month. The technology companies’ reports indicated slightly lower growth momentum, while smaller companies on the other hand, rose sharply with the US smaller companies index, Russell 2000, up 10 percent during July, measured in US dollars. Investors in smaller companies seemed to anticipate better financing opportunities when the central banks’ key interest rates looked set to be cut in the fall.

Tension increased

However, the broader stock market noted an increased risk that the US central bank, the Fed, would not cut interest rates quickly enough. In addition, macro data were generally somewhat weaker than expected during the month and consumer demand appeared to be slowing down. On top of this the labor market showed several signs of weaker demand. The consumer price index pointed to continued falling inflation, which with the persistently high Fed interest rates meant an even more restrictive monetary policy. The nervousness of investors increased, and many were forced to reduce the risk in their portfolios, not least those who had financed shares through loans in the appreciating Japanese yen.

Waiting for an interest rate cut

The US Federal Reserve’s chairman, Jerome Powell, confirmed, in connection with the Fed meeting at the end of July, that the bank was leaning towards one or more interest rate cuts this fall, as inflation had fallen, and the labor market looked likely to soften. They did, however, want to see further confirmation that the lower inflation rate was being maintained before the Fed funds rate was cut. Many observers believed that the Fed, with Powell at the helm, was already too late with a first interest rate cut and that the risk of a “hard landing” had therefore increased. Risks in the stock markets were thus judged to have risen and higher volatility marked the end of the month.

A hot (political) summer month

It was an eventful and important month in politics. The most important development was likely that, with the new support package from the US, Ukraine appeared to have better opportunities to defend itself in the war against Russia. The country began to destroy energy infrastructure inside Russia, which is critical for effective Russian warfare. Israel’s attacks on high-ranking officials within Hezbollah and Hamas, inside Lebanon and Iran respectively, were considered likely to lead to retaliatory attacks against Israel and the situation became very tense. Although an all-out war is still not seen as being very likely, many are concerned because it would be extremely risky for world peace.

The elections in England and France pointed in completely different directions. In England, the people voted in a Labor government for the first time in 14 years and tax increases are to be expected. In France, the right wing advanced strongly. However, they did not reach a level of major influence since the other parties effectively prevented LePen’s National Assembly from getting the full impact of their votes through electoral cooperation in the elections’ second round. Many worry that France, with this weak parliamentary situation, is heading for even higher budget deficits and that this could lead to a new crisis for the euro.

In the US, President Biden renounced his candidacy and Vice President Kamala Harris quickly succeeded in establishing herself as the Democrats’ presidential candidate, before the Democratic convention had the opportunity to discuss the issue. The Democrats were thus given a chance to quickly restart their election campaign with the US elections described by many observers as now having become much more even.

The healthcare sector in the background

The eventful month did not appear to have any immediate effect on the fundamentals of the companies in the healthcare sector. Healthcare issues were still in the background in the political debate and there was no indication that Harris would deviate significantly from the various positions of the Biden administration, if she were to be elected president.

OUTLOOK

Higher volatility and weakness in the stock market, not least in the tech sector, is now a fact. After a long period of restrictive monetary policy, there is a high degree of uncertainty about the US labor market. Long-term interest rates are falling sharply as a result of lower risk appetite, the increased risk of recession, and lower inflation. However, interest in smaller companies seems to have revived. Smaller companies are particularly important in the biotechnology subsector, as well as in segments of the medical technology, and the healthcare services subsectors.

It is unclear whether this renewed interest can last in a scenario where there are more and stronger signs of the economy’s weakening. Ideal conditions on the stock market for smaller companies are falling interest rates resulting from falling inflation, but not as a consequence of a weakened labor market or an increased risk of recession. A possible recession would be a threat to many companies. The players in the healthcare sector that are most likely to best cope with such a situation ought to be the major pharmaceutical companies and the large healthcare companies, both with stable cash flows and rising dividend capacity.

Critical months ahead

The next few months will be particularly critical, and outcomes may vary significantly depending on upcoming macro statistics regarding jobless claims and new employments, in particular. We believe in continued good fundamental prospects for the sector’s companies in all four subsectors, but continued rising volatility in the stock market could lead to profit-taking, despite mainly good reports for the first half of the year, mostly optimistic forecasts for the rest of the year and, in our view, well-substantiated values. We would like to highlight that the sub-sectors of the healthcare sector, on average, tend to perform well in the twelve months following an interest rate cut in the US. However volatility is here, and we can count on the near future to deliver a few surprises.