Bull and bear cases for pharma stocks

Last year’s overall stellar market performance extended to U.S. healthcare stocks — albeit to a lesser extent, leaving room for the sector to potentially continue its upward trend.

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While the MSCI U.S. Index was up about 30% last year, healthcare stocks returned about 14% (in U.S. dollars) and the sector was only the 10^th best market performer, said Murdo MacLean, client investment manager at Walter Scott in Edinburgh, U.K., in a Jan. 7 interview.

For pharmaceutical stocks in particular, valuations heading into 2020 are “a good bit more attractive” than in previous years, he said. “That is no guarantee that they will perform better, but it is something that I think we should bear in mind.”

Healthcare stocks have already played out well for MacLean: they were the biggest contributor, on a relative basis, to his portfolio’s performance last year.

“We’ve long felt [healthcare] was attractive,” said MacLean, who manages the Renaissance Global Growth Fund and Renaissance International Equity Fund. That longer-term positive outlook holds in 2020 given that the sector has underperformed relative to others and that global trade tensions were easing as the new year began, he said.

An offsetting factor, however, could be the U.S. election.

“Historically, pharmaceutical stocks have suffered during election years,” MacLean said. “That may well be the case again.”

That’s because politicians tend to target pharmaceuticals and their pricey drugs in emotional appeals to voters. “The threat of regulatory or pricing change often does lead to underperformance for a period for pharmaceutical stocks,” MacLean said.

Regardless of politics and macro trends, however, MacLean picks healthcare names based on how solid the businesses are.

“We will not buy any pharmaceutical businesses or healthcare companies if they don’t meet our internal investment criteria,” he said.

These include innovation and investment. “Our focus, specifically, is on companies that are highly innovative and have the return structure to continually invest for the future,” he said.

Further, he diversifies within healthcare, investing in pharmaceuticals, medtech and healthcare information technology.

“This diversification is crucial,” MacLean said. “It should enable the portfolio to both benefit from growth in earnings [and] also offer a degree of insulation should markets see a pickup in volatility.”

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Suzanne Yar Khan

Suzanne has worked with the Advisor.ca team since 2012. She was a staff editor until 2017 and has since worked as a freelance financial editor and reporter.