For investors: Medtech and services sector lives up to its reputation

The foreseeable stabilization of interest rates is having a positive impact on the stock markets, which are showing the first signs of recovery. At the end of July, the global stock markets (MSCI World Net +11.0%) closed clearly in positive territory and the Euro Stoxx 50 (+7.5%) and the German benchmark index Dax (+5.5%) also recovered somewhat from the sharp price setbacks of the previous months. In this environment, the medical technology and healthcare services sector also performed well. The sector, as measured by the MSCI World Healthcare Equipment & Supplies, posted a performance of 9.3% and significantly outperformed the broad healthcare market MSCI World Healthcare Net (+6.2%). We are also encouraged by the recent reporting of second quarter results. Boston Scientific, Stryker, Danaher or Thermo Fisher, but also US health insurers such as Molina or Centene reported results above expectations and were rewarded accordingly with rising share prices. However, even companies that did not quite meet expectations, such as Align, Intuitive Surgical or Edwards Lifesciences, recorded a positive share price performance. This is a further indicator that investors significantly reduced the risk discount thanks to the improved information situation, which more than compensated for the slightly lower outlook for the full year 2022.

Sales growth despite recession

The great uncertainty among investors regarding a recovery in treatment figures after the last wave of corona has given way to cautious optimism. Although the medtech sector is not completely immune to recession, inflation and interest rate changes, comments from companies have shown that the medtech and healthcare services sector has not lost its nimbus as a safe haven in difficult times. Looking back at the last major recessionary period in 2008-09, the vast majority of medtech companies showed revenue and profit growth at that time. Since then, the sector has continued to mature and has consolidated its character as one of the most defensive sectors. Medical technology is characterized by above-average earnings growth combined with low volatility. These strengths are particularly attractive in a market environment where investors are uncertain about the future development of the overall economy.

Acquisitions and new products in the medtech and services sector

We consider the further outlook for the 2022 stock market year in the medtech and services sector to be attractive. In the major markets of this sector (North America, Europe and Japan), infections and hospitalizations from the Omikron variant have declined rapidly and significantly. We believe that broad immunity will enable a significant recovery in elective procedures in 2022 and 2023.

The risk-return profile of the sector is seen as favorable by many investors. Regardless of a normalization of the Corona and geopolitical situation, long-term growth factors, such as rising life expectancy and high innovation, are causing the Medtech & Services sector to grow faster than the economy as a whole and to increase earnings at an above-average rate. For example, the long-term average earnings growth per share in the MSCI Medtech & Services is 12%, twice that of all companies included in the MSCI World Index. Higher material and logistics costs are real, but should be offset by well-managed companies. We also expect approvals and launches of many relevant products for diabetes and structural heart disease.

The sector's valuation base is moderate and not only offers opportunities for investors. We also expect increased takeover activity as the valuation multiples of many emerging growth companies have declined significantly. The Bellevue Medtech & Services fund (ISIN B-EUR LU0415391431) invests in the entire healthcare market excluding drug manufacturers. One of the reasons for the sustained success of the investment strategy is that the medtech and services sector is one of the most defensive healthcare sectors with sustainable outperformance potential. Combined with an additional growth spurt made possible by treatments postponed during the Corona crisis, this makes for an attractive entry point for investors.

Author:
Marcel Fritsch joined Bellevue Asset Management in 2008 and is portfolio manager of the Bellevue Medtech & Services and Bellevue Digital Health funds. Previously, he worked as a management consultant at Deloitte & Touche for more than 3 years. His responsibilities included the development of corporate strategies, the review of organizational structures as well as the valuation of companies in the run-up to transactions. Marcel Fritsch studied economics at the University of St. Gallen (HSG).
Further information: Bellevue Asset Management AG