Bellevue Medtech & Services (Lux)

The global stock index (MSCI World Net Index -2.9%), European stock markets (Euro Stoxx 50 -2.6%) and Germany’s Dax (-3.7%) corrected in October. The broad healthcare sector (MSCI World Healthcare Net -4.1%) also closed in negative territory and high-growth pockets within the healthcare industry, the Russell 2000 Healthcare (-9.9%) and the S&P Biotechnology Index (-9.3%) for instance, sold off even more. The medtech sector (MSCI World Healthcare Equipment & Supplies -6.0%) retreated as well, but the Bellevue Medtech & Services Fund (-5.2%) was not as weak as its benchmark.

The significant divergence within the healthcare sector can be traced to the renewed uptrend in US Treasury yields, which climbed to new highs in September. Rising bond yields are particularly negative for small-cap growth stocks in the medtech and in the drug-making space. 10-year US Treasury yields closed the month 36 basis points higher at 4.93%.

Stocks of US health insurance companies delivered pleasing returns. Cigna (+8.1%), Humana (+7.7%), UnitedHealth (+6.3%), Elevance (+3.4%), Molina (+1.6%) and Centene (+0.2%) made positive contributions to the fund's performance in October. Rising bond yields translate into higher investment income from financial assets (reserves) for US health insurers. UnitedHealth, Elevance and Molina surprised investors with better-than-expected earnings, a guidance upgrade for the current year and positive remarks regarding next year. Profit growth was mostly attributed to lower-than-expected medical cost ratios, and higher net interest income also had a positive impact. Centene expressed a bit more caution in its outlook for 2024. US hospital giant HCA (-8.0%) reported a disappointing profit margin due to unexpected losses from a joint venture. HCA’s core business, on the other hand, showed above-average growth.

In the medtech sector, Shockwave (+3.0%) was a performance driver. It specializes in intravascular lithotripsy systems for the treatment of cardiovascular disease. Shockwave announced new groundbreaking products at its investor day and its 2026 sales forecast and its addressable market projection, which it almost doubled from USD 8.5 to USD 15 bn, were also positive surprises.

Novo Nordisk decided to stop its clinical trial of semaglutide (GLP-1) in kidney disease ahead of schedule based on the strong outcomes of an interim analysis of trial data. This news triggered heavy selling in dialysis stocks and in other stocks across the broader medtech sector.

Boston Scientific (-3.6%) and Abbott (-2.3%), for example, were also marked down even though both companies reported solid third-quarter results, as was Medtronic (-9.9%). Stocks of fast-growing companies such as Penumbra (-21.0%), Intuitive Surgical (-10.3%) and Edwards Lifesciences (-8.0%) sold off even more. Rising bond yields fueled the selling, and even a minor blemish in an earnings announcement added to the downward pressure. Align Technology (-39.5%) plunged after missing Q3 consensus expectations by a wide margin. Its management blamed the miss on a dip in consumer confidence in the US, which also dragged Idexx into the red (-9.1%).

Life sciences tools companies Danaher (-12.6%) and Thermo Fisher (-12.1%) corrected after they mentioned in their Q3 earnings reports that inventory destocking at customers would remain a headwind for their bioprocessing businesses. All performance data is in EUR / B shares.

The pandemic hobbled industry growth for 2 years, but the medtech market has now shifted into a higher gear and we expect the faster pace of growth to continue well into 2024. We also expect numerous important products for diabetes and structural heart disease to be approved and launched.

We think the broad correction in the medtech sector triggered by GLP-1 trial readouts is an overreaction and will be short-lived. The low valuations give the sector considerable upside potential and offer investors attractive entry points.

The current stock-market situation is enticing not only for investors. We anticipate an upturn in M&A activity because the valuations of many promising, fast-growing companies have declined to such low levels. Should a recession actually materialize as some fear, the fund has delivered good relative returns in the past even during tough economic periods.

The Medtech & Services Fund invests in the entire healthcare market except for the drug developers. The medtech & services sector is one of the stock market's most defensive sectors with sustainable outperformance potential and that is one reason for the unqualified success of our investment strategy. We also expect procedure volume growth to remain high during the 2024 investment year.