Simplify the complex with clear and concise market insights direct from our investment experts every week.
Equity markets with Brian Flavin, Senior Equity Research Analyst
US Healthcare is showing signs of life after lagging in 2023 – what is our view of the sector?
- US Healthcare earnings are high-quality earnings. The sector should deliver long-term earnings growth consistently in the high single digit range, thereby generating high returns on equity.
- This is due to the long-term structural drivers that remain unchanged no matter the macro background – not only are people ageing but there is greater access among those ageing populations. This is happening in emerging markets but also in the US, where Obamacare has enabled historically locked out individuals to access insurance.
- What’s more, the recent popularity of weight-loss drugs is bringing a new cohort of people who previously would never have engaged with the healthcare system into the fold (see Chart of the week for more information).
- Other drivers include innovation – not just in drugs, but also in medical devices where we now see cardiovascular products and robotic instruments that can use artificial intelligence to perform non-invasive procedures.
- Healthcare, along with IT and Staples, are the sectors generating the highest returns on equity. Even after last year’s underperformance, we did not reduce our overweight position to Healthcare further because it was clear that there should be an earnings recovery this year as things normalise following the pandemic. And that is proving to be the case.
- US Healthcare is on track to deliver over 15% growth this year, which is about a third higher than the market, where there’s more uncertainty.
Fixed Income with Elizabeth Geoghegan, Head of Fixed Income Strategy
What happened in fixed income markets last week – and what does it mean for our positioning?
- Interest rates fell last week with the German 10-year bund falling below 2.30% at the Thursday close, the first time since early February. These moves came after the European Central Bank (ECB) meeting, where even though the central bank didn’t cut rates, the changes to economic projections had a meaningful impact on market expectations.
- Inflation and economic growth forecasts were both revised downwards, the most meaningful change being that the ECB now expects headline inflation to come in line with the 2% target by 2025.
- Looking at our positioning, the moves and commentary are a positive for long duration assets. In recent editions of Investment Viewpoint, we highlighted how bond markets have sold off as rate cut expectations have moved to better align with central bank expectations.
- We viewed the moves as constructive for long duration assets as it limited the risk of further moves higher in interest rates. Our view was that the risk of any further increases in interest rates required a change to central bank commentary in a less dovish direction.
- We did not see that last week, during the press conference ECB President Christine Lagarde noted the continued progress on disinflation, and although she noted that they needed “more evidence” before making any decisions, markets took solace from the fact that she indicated that they will have a lot of data by June.
The week ahead: what to watch out for
With the passing of earnings season and less focus on themes, macro data and what it may mean for interest rates should now return as a primary driver of markets.
This week, the key datapoints are the US consumer health and inflation trends. For the consumer, hard and soft data will be released in the form of US retail sales for February and the latest consumer sentiment data. For inflation, all eyes will be on the US Consumer Price Index (CPI) and Producer Price Index (PPI) data. The market and the Fed want to see evidence that core inflation is easing and these two measures are key inputs into their thinking. For example, core CPI surprised to the upside in January and the market is looking for a slower sequential pace in February – 0.3% vs. 0.4% previously - to bring the annual rate lower than the 3.9% previously. Core services inflation, incorporating rental inflation, is the key driver and will be closely monitored as it has been sticky. Core producer prices are also expected to slow sequentially. These data should dictate market movements, for now.
