Bellevue Medtech & Services (Lux)

After advancing for a couple months, stocks consolidated in the final month of the year. Global equities headed south in December (MSCI World Net -7.8%), as did the Euro Stoxx 50 (-4.0%) and Germany’s DAX index (-3.3%). The Bellevue Medtech & Services Fund (-4.4%) and its benchmark (MSCI World Healthcare Equipment & Supplies -4.2%) were unable to escape the market’s downward pull but they still performed relatively well despite some weakness in the US dollar (US Dollar Index DXY -2.3%). Downside support came from the healthcare sector’s traditionally favorable position in the face of a looming recession.

Looking back on a challenging investment year, the Bellevue Medtech & Services Fund
(-12.0%) clearly outperformed its benchmark (MSCI World Healthcare Equipment & Supplies -19.8%) in 2022 and was in line with global stocks (MSCI World Net -13.0%), Germany's blue-chip DAX (-12.7%), and the all-share Swiss equity index (-12.5%), but it did lag the Euro Stoxx 50 (-8.6%).

While it is pleasing to see that our investment strategy produced good results with its focus on commercially successful medtech companies that are also innovation leaders and on healthcare services providers such as US health insurance companies, we had hoped to beat the entire market given the fundamentals of the medical technology sector. Performance in the first half was held back on the one hand by macro factors such as the renewed wave of coronavirus infections in the spring and the resulting constraints that produced, also in the healthcare sector. On the other hand, the rapid rise in interest rates in the USA and the resulting sharp decline in the valuation multiples of innovative growth companies also prevented the fund from delivering a better performance.

We are confident that company-specific business developments will play a greater role in the performance of individual stocks in 2023. The significant progress that companies have achieved should attract more attention again as the macro environment becomes less unpredictable. Many companies are on the verge of receiving regulatory approvals and launching major new products and services, particularly in the areas of structural heart disease, diabetes, neurostimulation and surgical robotics. We expect a significant acceleration in M&A activity in 2023 too. Potential targets are trading on attractive valuations and large medtech companies have lots of cash to spend.

In contrast to most other industries, the current consensus that a recession lies ahead is a positive factor for medtech & services. Whereas companies in many sectors report weaker sales during recessions, historical data shows that the healthcare sector is largely unaffected by the cyclical fluctuations in overall economic activity. Even if demand in the medtech & services sector does ease a bit due to recessionary forces, the release of pent-up demand in the wake of the pandemic will provide some support. Investors will nevertheless keep a close eye on US interest rate developments. That said, compared to January 2022, we are already confronted with much higher interest rate levels.

The J.P. Morgan Healthcare Conference, the premiere investor event for healthcare stocks, is scheduled for early January. Many companies will present preliminary results for the fourth quarter of 2022 and give an initial outlook for the coming fiscal year. All in all, we believe the medtech & services sector is very well positioned for the coming investment year, both in relative and absolute terms. All performance data is in EUR / B shares.

Hospitalization rates in key medtech & services markets fell quickly and steeply. We believe that high immunity levels will enable a significant rebound in elective medical procedures in 2023. The sector’s risk-return profile is enticing for many investors. Regardless of when the pandemic and the geopolitical situation returns to normal, the sector-specific structural growth factors such as rising life expectancy and high rates of innovation will sustain the medtech & services sector's above-average growth versus the overall economy and power its high rates of profit growth.

Moderate sector valuations spell opportunities, and not only for investors. We anticipate an increase in M&A activity because the valuation multiples of many promising, fast-growing companies have declined so much. The Medtech & Services Fund invests in the entire healthcare market except for the drug developers. As a fully adequate healthcare investment vehicle, the fund aims to generate a significantly higher return than a traditional healthcare fund but with a comparable risk profile.

The medtech & services sector is one of the stock market's most defensive sectors with sustainable outperformance potential. This and the additional growth from non-emergency treatments that had to be postponed during the pandemic create attractive entry points for investors.