Why US healthcare stocks are offering opportunities for Asian investors

With the forthcoming repeal of Obamacare, investors with an opportunistic outlook and higher risk tolerance have begun eyeing US healthcare stocks after being leery of them before the US elections.

Global equity investors, particularly in the US, have become more risk tolerant post-Brexit, a trend which strengthened following the Trump election, and has changed market sentiment from being “defensive” to “opportunistic” for global equity investors, according to Adam Schor, Denver-based senior vice president and director of Global Equity Strategies for Janus Capital Group.

“One thing that has happened since July, and I’m not certain why Brexit was its green light, was that investors became much more risk accepting, risk tolerant and became eventually less yield focused. We have moved from a defensive market to a very opportunistic market. I think the Trump election has cemented that,” says Schor in an interview with The Asset during a visit to Hong Kong.

Because of this trend, investors are now seeing more long-term growth opportunities in the US healthcare sector because of prospects for reduced political uncertainty as well as good fundamentals including innovation and demographics.

The US healthcare sector, particularly insurance companies, have been under cost pressure largely as a result Obamacare, also known as the Affordable Care Act (ACA), a controversial law that requires Americans who can afford to buy insurance directly from a provider to pay higher premiums in order to help pay for the subsidies provided to lower-income insurance buyers who get their insurance from government-run entities.

Although the law has successfully increased coverage among lower-income Americans (the proportion of Americans without any health insurance has declined to 11% in 2016 from 16% in 2010, when Obamacare was enacted, according to a Gallup survey) critics of the law have argued that that insurance premiums are expected increase by an average of 22% in 2017.

“We’re now entering a period of attractive valuations for healthcare. The political environment is less onerous, and the underlying trend for better innovation and more demand for healthcare as people get older is not going away. The hospitals were under more pressure because of Obamacare but we think the pricing of pharmaceuticals is a little less worrisome. So there’s going to be a shift, which is why we want to be very active in the sector,” Schor says.

Schor’s comments have been supported by a recovery in the broad healthcare stock index which has gone up by 3% in February after falling by 6.3% since August 2016.

Despite the improved prospects for healthcare, Schor says investing in this sector demands strong fundamental research capabilities because of the higher risk in healthcare compared to other sectors.

“From a fundamental investor’s point of view the risk of being wrong in healthcare is greater than in any other sector. There are very few sectors where you can see a stock go down 70%. It could happen here all the time. With that in mind our portfolio is about deep fundamental research but with a really strong risk control that keeps us diversified and keeps our volatile positions relatively small,” Schor says.

Janus Capital’s healthcare investment strategy has about US$6.2 billion in assets under management which includes a US fund, a non-US fund, and separate accounts.

Date

9 Mar 2017

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