Sell-Off Has Created Opportunities in Global Health Care

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Michal Marszal, CFA

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My name is Michal Marszal. I’m a portfolio manager focusing on the global healthcare sector at CIBC Asset Management.

The question, now very relevant, to ask is, “Where are we right now, and what should be the positioning within global healthcare?”

I believe that the sector itself is attractive for equity investors. The entire benchmark, the MSCI World Health Benchmark, which represents global healthcare, is right now trading at more attractive multiples than we have seen at a peak just six to nine months ago in the fall of 2021. However, it is still somewhat elevated as compared to the median range over the last decade or so.

There has to be a lot of caution as investors are approaching this sector of, I suppose, many others, with respect to where to be invested in, how to avoid being exposed to the majority of the headwinds, but also be ready to take advantage of an increasing level of volatility. Which, for example, within the riskiest of the major benchmarks within global healthcare, the NASDAQ Biotech Index, has resulted in a decline in value of that index of over 30% from peak, which occurred in the middle of 2021 until now, basically about a year later.

Very wise positioning in the context of the types of developments that we’re seeing within equities, as it relates to global healthcare, is to retain a significant exposure to the large-cap pharmaceutical and U.S. services sector with very, very targeted exposure to certain medical technologies. These companies offer performance with lower volatility. They, generally speaking, offer higher yield. And they are, on average, more economically defensive than other pockets of healthcare, which are defensive in and of themselves. Here, I would notice, within the pharmaceutical sector, companies such as Johnson & Johnson, Novartis, Sanofi, as companies that are offering very attractive risk-adjusted returns on a go-forward basis.

Within medical technologies, I would note category leaders, very well-diversified players, such as Medtronic or Thermo Fisher, as very reasonable exposures for investors. And within the U.S. healthcare services sector, I continue to be very excited about the developments that we’re seeing within managed care in that specific market. And companies such as United Health and CVS are still a very attractive investment for investors, even in light of their reasonably good recent performance.

As I mentioned, though, it is now time to take a look at some of the riskier assets that, while having an inherently higher volatility, given the substantial reduction of asset prices within these riskier segments, are now becoming very, very attractive for investors that are willing to look past the types of headwinds from a risk perspective in the financial market over the next 12 to 18 months and look at the investments from a long-term perspective.

Here, I would definitely mention pockets of opportunities within biotechnology, which is now much more attractive. And, as usual during a sell off, most assets within a sector like that, have sold off to a comparable level, regardless of their attractiveness from an upside/downside perspective, as well as pocket of devices and life science tools, which are becoming more attractive from extremely elevated valuations that we have seen last year. Mostly as a function of these being more highly correlated with the broader technology sector, where valuations have been very stretched and expanded and really represented more downside risk than reasonable asset.

At that point, these are now finally coming into a more reasonable upside/downside window. And I think that the reasonable approach here, even for a long-term investor, is to really, now, take a closer look at individual assets, given more reasonable valuations for the space overall, look at the upside/downside of an asset on an individual basis rather than considering possible macroeconomic scenarios for the sector overall. And, when it comes to trying to handicap the types of scenarios that we could be possibly dealing with, with respect to interest rate environment and so on, just apply a very reasonable range of scenario analyses that take those into account within discounting the cashflows that are the foundation for the valuation of a lot of these assets.

I could certainly mention here assets that, in my opinion, have very recently become much more attractive. So biotechnology stocks, such as Sarepta or Revance, are very interesting of benchmark, but well-known companies within their spaces. Attractive assets, which are actually already commercial-stage companies to some extent, developing very, very significant attractive pipelines with very near-term catalysts. Which diminishes the level of relative volatility that these types of assets will have, as compared to the broader biotechnology index or other small- and mid-cap indices within global healthcare.