«We remain convinced that healthcare is a good place to invest»
Mr. Sjöström, how do you review the last year on the stock market?
During the last quarter of the year, equities remained on a roll, rising even higher. The MSCI World Index grew an impressive 14.7 percent, ending the year up 16.3 percent. Tech and cyclicals drove the increase, as economic optimism prevailed, fueled largely by continued government stimulus spending, expansive monetary policies, and the results of Covid vaccine trials, which exceeded expectations. Healthcare stocks also rose during Q4, but less markedly. The MSCI World Healthcare Index added 6.8 percent to end the year up 13.5 percent, trailing global markets.
As a specialist in healthcare stocks what was remarkable for you?
Within healthcare, the strongest performances came from small- and mid-caps, as evidenced by the 30.8 percent increase of the Russell 2000 Healthcare Index, which lifted its performance 45.2 percent for the full year. All in all, an exceptional year for equities, especially when viewed from the troughs of late March. Our stance has proven to be excessively cautious and none, or very little, of the bumps we predicted have materialized.
Last quarter you had listed potential market challenges. How do you assess the result?
In this respect, we note that, of the potential market «tests » we listed last quarter, two have have had best-case outcomes, while the others have not yet (fully) materialized: The US election has produced a less controversial president, but one with limited power to implement real changes via a potential razor thin majority in Congress, and three Covid-19 vaccines yielded phase III results sooner and more successfully than even the most optimistic observers predicted, and were even approved in several jurisdictions in December.
What decisions are still pending?
For the rest, the jury is still out: What will be the real impact of the crisis on companies’ bottom lines and growth? Which statistics will reveal the true economic picture, as the effect of government subsidies subsides? What are the challenges, and potential opposition, to governments’ continuing support of the economy? All remain developments that could unsettle the markets in the coming months, especially as a rapid end to the coronavirus crisis is now widely expected.
What is your further outlook?
We remain cautious about the ability of markets to continue to rise or even maintain current levels. The next couple of weeks may still be buoyed by the optimism generated by the emerging vaccine campaigns and the possible end of the crisis; however, a new reality will eventually emerge. Even if the crisis has had the benefit of accelerating the digital restructuring of the economy and low rates are likely to persist (making equities the default), significant clouds are gathering on the horizon: debt, unemployment, inflation and higher taxes. Of course, not everything will necessarily go wrong, although it could. The point remains that, given market expectations, not much actually needs to worsen for the excitement to fade. Therefore, we remain convinced that healthcare is a good place to invest.
What are the advantages of the healthcare sector?
The sector will be a net winner in this crisis and should see its current discount to the market wane. We prioritize quality for the same reasons and believe the defensive characteristics of biotech and pharma, one of the more modest performers in 2020, are attractive in this uncertain environment. In medtech, we are more cautious on names with pronounced cyclical exposure. Our positive stance on small- and mid-cap biotechs and medtechs, as well as on service companies, is counterbalanced by the group’s strong run in recent months. We think a pause is overdue but remain strategically committed to the group, based on its innovative capabilities. The same holds for healthcare companies in emerging markets. They remain fundamentally attractive, as they offer exposure to rising healthcare spending in these markets for the foreseeable future, but their recent run warrants some short-term caution.
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Michael Sjöström is Co-Founder and Chief Investment Officer (CIO) at Sectoral Asset Management. He founded Sectoral Asset Management with Jérôme Pfund in 2000. Prior to establishing Sectoral, he worked for two Swiss banks and, in 1993, joined Pictet & Cie in Geneva as a pharmaceutical analyst. From 1994 until October 2000, he was the Portfolio Manager of Pictet Fund-Biotech and head of the pharma analyst team. Michael Sjöström graduated in 1987 from the University of St. Gallen with an MBA in Finance and Economics. He obtained his CFA charter in 1996.