Bellevue Diversified Healthcare (Lux)

Healthcare significantly outperformed global equity markets in April 2023 (MSCI World Healthcare 3.5% vs MSCI World 1.8%). The Bellevue Diversified Healthcare Fund (B-shares; 4.4%) outperformed its healthcare index benchmark.

The month started with an notable escalation of recession fears triggering a rotation into defensives. This macro driver was supported by positive expectations in medtech ahead of Q1 results. But once the results season started, better than expected earnings across equities drove a more benign view of the global economy, and a trade out of classic defensives. The last week in April was difficult for the sector, which underperformed global equities by 124 bps as a rotation into mega cap tech took hold.

When looking at the key subsectors, medtech was the strongest performer in April (+7.0%) driven by positive utilization trends, followed by pharma (+5.3%) and a rebounding services (+3.8%) subsector. Funding concerns weighed on biotech (-0.7%), while life science tools was a notable drag on the sector in the month (-3.8%) as bioprocessing remained a concern.

Deep value and defensive quality healthcare stocks saw a comeback in April, outperforming on a relative basis (deep value; +5.2%; defensive quality; +4.7%; structural growth; +2.6%; cyclical tilt; +1.4%; disruptive growth: -1.2%). Year-to-date, the cyclical tilt style stock bucket has reported the best performance (+15.3%), reflective of a late-cycle dynamic.      

Within the healthcare index, mega caps (USD 200 bn) outperformed (+4.8%) in the month versus large caps (USD 60-200 bn; +3.3%) and mid caps (USD 2-60 bn; +1.5%). Healthcare mega caps have performed well, supported by Eli Lilly and Novo Nordisk. Indeed, moving down market capitalization has not been rewarded for at least two years.

European healthcare significantly outperforming the US and Asia in March (Europe; +6.5%, US; +2.9%, Asia; +0.7%). The European performance is supported by Novo Nordisk, and the dental/hearing aid cyclical-tilt style stocks.  

Obesity drug attention has moved beyond healthcare and into the broader public consciousness. Beyond, improving hospital utilization and Alzheimer’s disease drug catalysts (May 3) are delivering and driving outperformance for the companies involved. Broadly speaking, these three themes involve mega- and large-cap companies, supporting the outperformance for these market-cap buckets.

The macro environment remains volatile, with style leadership shifting rapidly. We remain diverse and diligent. Visibility into the latter half of the year is difficult given macro uncertainty. Across multiple macro scenarios, the inelastic demand, security of earnings, and strong pricing power in healthcare should support relative performance. We note that healthcare has typically outperformed after peaking interest rates (because peaking rates often signal weakening economic fundamentals).

Life science tools has suffered from bioprocessing destocking and biotech funding concerns. Post weak Q1 results, the stocks have been rebounding in recent days. Looking ahead we see the US debt ceiling political tussle as the next concern, where the NIH budget could come into the firing line. Beyond the headline risks, valuations still seem rich given potentially weakening fundamentals. We therefore maintain our underweight position.  

Pharma and biotech have the catalysts on the horizon to push the group higher (Novo Nordisk in obesity, AstraZeneca in lung cancer; Eli Lilly & Biogen Alzheimer’s regulator progress). Although we are starting to enter valuation ranges where perfect execution is needed. Especially in obesity, where a failure in the SELECT study could be taken very negatively. Looking forward, attention could shift back to US policy risk as we approach the IRA Medicare negotiation.

Across large cap medtech, Q1 results and guidance adjustments were positive, although stock reactions on positive prints muted (or even negative). We maintain a positive view on the fundamentals, and therefore maintain our small overweight. Healthcare services remain in the policy cross-hairs with attention focused on the role of PBMs, although valuations have corrected to more interesting levels.