Why Healthcare Equities Bounced Post-Brexit
This is a brief summary of a note I wrote last week for clients of BMI Research. The piece analysed why healthcare remains a bright spot despite the ‘Leave’ vote. It was written with an investor-focus, and did not attempt to survey the post-Brexit healthcare industry from a patient / user / researcher perspective.
In the wake of the UK’s vote to leave the EU, healthcare equities benefited from the broad market sell-off. GlaxoSmithKline, AstraZeneca and Smith & Nephew (among many others) were all trading up in response to Brexit, with share prices (as of close on June 29) increased by a range of 6.5–12.4% from close on June 23. Although the FTSE 100 has rebounded from the shock in the initial post-referendum trading sessions, the index was still only up 0.3% over the same period (23–29 June).
Healthcare is characterised as a ‘defensive’ stock, and there are a series of fundamentals that underlie its status as a ‘safe haven’ for investors. These are structural factors in both the healthcare market and the operations of healthcare companies. Cumulatively, they explain the recent market reaction, and support the long-term bull case.
1. Globalised multinationals are shielded from macroeconomic flux. The US and non-European international countries provide the overwhelming majority of revenue and profits for FTSE 100 healthcare companies. This boosts the attractiveness of healthcare equities in unstable times, and will shield these businesses post-Brexit.
2. The (relative) political security of healthcare. The UK government is ideologically committed to health spending and the NHS. This outlook will likely remain irrespective of Brexit, providing further support to companies that operate in healthcare (even if UK exposure is minimal — see point above).
3. Demographics provide short- and long-term reassurance. The inevitability of healthcare decouples it from the negative investor sentiment seen in other prominent FTSE 100 industries. Firstly, on a short-term basis, the population needs healthcare, irrespective of the state of the wider economy. Secondly, on a long-term basis, the UK’s growing elderly population will ensure demand for effective healthcare continues to increase.
While it would be nice to believe that the skyrocketing value of healthcare companies was purely on the basis of industry fundamentals, there are a couple of broader external factors that must also be acknowledged.
4. Weakness in the pound sterling is not a massive drag. AstraZeneca and Smith & Nephew report their financial results in US dollars, given the minimal reliance on UK/Europe for revenues, the impact of weak currency translation will be small. GlaxoSmithKline reports its results in pound sterling, so sustained currency weakness would boost the value of its international sales.
5. And — pound sterling depreciation may have encouraged currency-based opportunism. For international investors, the drop in the pound sterling makes UK assets cheap (relative to other global instruments). If foreign investors are looking to profit on the post-Brexit FTSE 100, then healthcare is a natural location for investment activity given the industry’s safe haven status (the basis of which is explained above).
6. Hints of future financial stimuli have supported the broader FTSE 100 recovery. Suggestions that the Bank of England is prepared to provide further stimuli to support financial markets has restored confidence. This was the primary driver of the whole-market lift at the end of last week. Healthcare equities have undoubtedly benefited from this too (although their out-performance before the chat of BoE intervention is notable).
