Market Musings 23/05/21: Give your portfolio a clean bill of Health

23rd May '21 by Edmund Shing

17 comments 3393 reads

Give your portfolio a clean bill of health

Summary:

Podcast: Sell in May and go away?
Focus on Healthcare

Podcast: Sell in May and go away?

· Sell in May and go away? Seasonality explained.
· Upgrades, downgrades, economic recovery in the pipe …. Buy, sell or hold? That is the question.
· How can prudent investors rebalance their stock portfolio to be more defensive?
What about other asset classes or “alternative assets”?

Sell in May and go away?

Focus on the Healthcare sector

There are several reasons to buy into the healthcare sector.

The first is the long-term structural growth inherent in sector. This comes from a combination of factors, including aging demographics in the Western world.
Secondly, the fact that even in the, even in emerging markets, rising wealth implies greater spending on healthcare.
And thirdly, the continued advances in medical technology and new drug discovery, being helped notably by new techniques including artificial intelligence.
Seasonality: Note to that over the summer months defensive sectors tend to outperform the broader stock market, remember the summer months are not particularly kind of stock markets, defensive sectors do better. Prime amongst which is the healthcare sector. From a seasonality perspective, the next few months should be relatively propitious for healthcare, as opposed to other sectors.

Healthcare spending: has grown to be 18% of the US economy

Source: Statista

In addition to that, we can see a very simple point which is that health is wealth at the end of the day. There is no good being rich, if you don't have your health. I think people understand this more and more.

New Focus on Wellness

Demographics a key structural driver

Today, the ageing demographic in rich countries worldwide is a huge structural driver for healthcare spending, thanks in large part to increased life expectancy.

Increase in average age expectancy 2011-2018

Source: World Bank

Note that above 65 years old, healthcare spending tends to rise exponentially, driven by cancer, dementia/Alzheimer’s, type 2 diabetes and auto-immune diseases such as arthritis.
Healthcare spending explodes > 65

Source: registererdnursing.org

Outperformance on high quality

Historically, if we look over the last 20 plus years, the health care…

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Michael Tee

23rd May '21

Ed,

Your weekly musings always make interesting reading. I have held all 3 investment trusts you mention and my experience with them is very good. Today my window to this sector is through 2 small companies which assist pharma companies in the process of getting their drugs to market:

Instem (LON;INS) and Cambridge Cognition (LON:COG).

I like that neither company is dependent on the success or failure of a particular drug.

Michael.

gus 1065

Morning Edmund.

Excellent piece as always. I agree with your view that long term trends point to supportive demographic change, increased healthcare demand and more available/higher cost procedures all providing a strong tail wind to the sector. Do you have a view as to the apparent short term blip since the peak in mid February for many of the securities mentioned? For example £BIOG is down about 22% from its 2021 peak, £DOCG is down about 18%. Is this just part of the wider rotation out of “tech” that seems in vogue at the moment (as you say a lot of healthcare stocks have significant tech characteristics) or something more specific to healthcare in particular, e.g. a view that as we (hopefully) move to a post Covid world the healthcare sector is short term at least a bit overbought during the last year or so? Maybe at these levels it’s just an improved buying opportunity?

Gus.

Edmund Shing

Hi Gus,

exactly. As always, in a piece like this, I can't go into as much detail as I might, otherwise I would be writing a novel each week!

But you are correct in assuming that DOCG is highly correlated to "growth" and tech, as this particular ETF holds a lot of high-growth medtech stocks that tend to move in line with US tech generally, at least in the short-term.

If you look at the wider US or European health care sectors, they have rather under-performed the wider US and European stock markets since March last year. So hardly overbought...

Edmund

Yes Michael,

I am always a fan of this "picks and shovels" approach in general... For exactly the reason that you mention. That is also why I have not mentioned any particular stock names in this article, as I think the majority of investors without specific sector knowledge are better served with a more diversified approach via funds/ETFs.

William K

Many thanks as always Edmund. Some interesting healthcare assets to examine. For whatever reason, many of them seem to be either 'very cheap' or in a Stage 4 decline with prices below the 200 day EMA. On the premise that the ageing world population will need more and more healthcare, my guess is that these could be solid buying opportunities. I shall be examining them in more detail and adding them to my watchlists.

CabinPressure

If you think buying an Investment Trust, or an etf, or a similar fund is going to solve your problems, think again. Never buy at the top. Buy the dip. So if BIOG is 22% down, GOOD, as it may be, or soon be, at the bottom of the dip.

Secondly, understand what is in the basket that makes up the fund. You may find 20% of the fund value is in one stock that you don't particularly like.

Third, check you can buy now at the quoted price. I bought a Baillie Gifford fund recently, but the buy instruction was not enacted until 2 days later. When I queried this, I was told I might have had to wait even longer than 2 days.

However the fundamental point about the medical and related sector being a good risk is probably correct in my opinion, and am currently searching for target stocks.

But am trying to avoid impulsive buys. Too many scars.

carmensfella

There is a Healthcare Sector show on Tuesday evening with Edmund featured and also at least six companies doing 30 minute presentations with Q&A

https://melloevents.com/investingoodhealth/

If any of you would like a ticket then either purchase a ticket for the MelloMonday show and the Healthcare one is free or if just wanting to come to this show please use this code MMStocko21 and it will be half price

David

ambrosia

This might be a bit off topic, and feel free to tell me to shut up, but this thread is good at looking at the big picture

5 year average PE ratio for the S&P is 18 and for the 10 year average its 16.

We're coming to the end of the US reporting season and the average PE ratio is currently 22 for the S&P.

Yes were just coming out of COVID, but forward PE is still 21

that means the S&P is 14% to 29% overvalued.

I'm also thinking about; rising input costs, bottle necks, difficulties in the labour market, possible rising interest rates around the world.
So will those earnings even be sustainable ?

Is sell in May and go scuba diving in Portugal for a long summer a good idea, well for this year at least?

24th May '21

Useful observations Ambrosia. Whilst the S&P 500 looks fundamentally healthy and in a strong uptrend, it is somewhat overvalued historically in terms of the PE. I think it could easily dip to 4000 or even 3800 (5-10% correction) over the summer months, at which point I shall top up my holding in £VUSA .

(Note: there was an 11% correction of the S&P 500 in September 2020 so we're due another significant correction any time now!)

Vsihv

Hi Edmund - with these thematic ETFs how much is real vs buying into bubble / Arkk favs

i think one you suggested was INRG - in Jan it had PlugPower at a 8% position now it is down to 3%

Similarly I held DRDR, which did very well but was loaded with Cathie Wood favorites like editas and crispr, which is main reason I sold out.

i would suggest anyone buying into themes look carefully at ETF construction and holdings to see if you are comfortable not just a boiler plate idea statement but black rock, vanguard & L&G probably don't like diluting the marketing message or heaven forbid, have investors think before they act.

"One the main reasons for this outperformance has been the ability of the healthcare sector to raise prices through innovation, demonstrated in the way that medical cost inflation has far outpaced the overall inflation rate in recent years."

By innovation, I expect you mean innovative lobbying?

timarr

Generally healthcare stocks have been an "obvious" investment in the last half year. Many of the more straightforward listed companies - at least here in the UK - had seen earnings knocked by the pandemic yet it was clear that the demand was in the main simply delayed (e.g. the need for hip replacements doesn't go away because surgery is delayed, other than the small number of people that die in the interim).

There's a difference, of course, between the more speculative and experimental end of the sector which attracts a lot of the hotter money and the more straightfoward medical services and devices providers. At least in the UK, as the NHS deals with the backlog it has to innovate and outsource, there's every reason to think earnings can fully recover, and possibly exceed, pre-pandemic times.

Anyway, it's worth browsing among the Healthcare Providers & Services and the Healthcare Equipment & Supplies sector. I reckon there may still be some value there, although many stocks have seen prices recover quite sharply in the last six months.

Rojo

Thanks Edmond. This article is really interesting and helpful. With regard to the investments trusts you mentioned, what is the main difference between them?

Well Rojo,

WWH is more of a general pharmaceutical company trust, so larger more diversified companies in general, while both BIOG and IBT are more focused on higher-return potentially, but higher-risk biotech companies.

So I would choose between WWH and BIOG, depending on your risk preference.

thanks

ricardow

Hi Edmund,

Thanks for this excellent article.
For those who would like single company access rather than by way of investment trusts, a fast growing but always conservatively reporting option in the medical devices sector is Ekf Diagnostics Holdings (LON:EKF) . This company has a tie up with the Mount Sinai Health System in New York and therefore access to the US market.
If you have a higher risk tolerance, have a look at Renalytix Ai (LON:RENX) and Verici Dx (LON:VRCI) - both into kidney disease - and a brand new flotation (next week, I think) called Trellus Health ( £TRLS ) which gives access to the mental health treatment market currently for IBS (irritable bowel syndrome) - this is a massive market in the US.
These latter three companies are all Mount Sinai spin outs via Ekf Diagnostics Holdings (LON:EKF) (I hold).
Best wishes

Ricardo

Matt1953

Thanks and enjoy Sunday

grumpy5

28th May '21

Orbimed are the managers of both Biotech Growth Trust (LON:BIOG) and £WWH. They have high quality analysts and PMs in the key markets around the world. Their presentations are well worth watching. Obviously I own both.