(Bloomberg) — Sean Lo isn’t worried that health-care stocks have lost some steam recently.
The manager of the Sectoral Emerging Markets Healthcare Fund, which has about $16 million in assets, believes longer-than-expected economic disruptions caused by the coronavirus pandemic will prompt investors to return to health-care stocks for their defensiveness and criticality. A revival in earnings will be one of several key catalysts to boost the shares in the second half, he said.
An MSCI health-care index for global emerging markets has gained 32% year-to-date, beating all other industries. The outperformance started to fade, however, as hopes for a faster economic recovery led to a recent sectoral rotation into laggards, like consumer discretionary stocks. The sector is the second worst-performing one on Tuesday.
“Our outlook for the sector remains favorable,” said Lo, whose fund beat 99% of its peers in the past year. “We are encouraged by containment efforts in major emerging markets and expect health-care companies in those geographies to return to normalcy in the second half, which will be supportive for share prices.”
The global economy will remain largely constrained until a clear solution for Covid-19 — either a vaccine or a drug that would make a meaningful difference — is found, Lo said, adding that even in the most optimistic of assumptions, it may take two or three more quarters to identify what that containment is and a few more years to make it widely available.
Lo sees China’s health-care companies facing the best prospects, with short-term opportunities arising from stocks that provide solutions to fight the pandemic and longer-term opportunities emerging from policy changes that encourage improved quality and greater innovation.
The MSCI Emerging Market Health Care Index trades at about 31 times 12-month positive earnings per share, 108% higher than the level for the broader EM benchmark, according to data compiled by Bloomberg. That premium is still within 1 standard deviation of the historical mean of 82%, Lo said, adding that the valuation is still within a “reasonable” range.
Shares of South Korea’s Celltrion Inc. and Celltrion Healthcare Co. were added to the fund’s top-10 stocks in June, according to its latest fact sheet. WuXi Biologics (Cayman) Inc., Alibaba Health Information Technology Ltd. and Sino Biopharmaceutical Ltd, are its three biggest holdings.
(Updates health-care index move in third paragraph)
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