Three reasons for optimism in challenging markets - May Trust Update

Market and sector review

Global equity markets experienced a robust rebound in May, driven primarily by a rotation into more cyclical sectors, notably information technology, communication services and consumer discretionary. This trend, which began in the previous month, continued to gain momentum. The S&P 500 Index has now surpassed its pre-presidential election level and fully recovered its losses from earlier in the year. In contrast, the healthcare sector significantly underperformed the broader equity market during May. Within healthcare, subsectors such as facilities, equipment and distributors posted positive returns, whereas managed care, healthcare information technology, and pharmaceuticals faced an especially difficult month.

The ongoing developments in Washington continued to shape global investors’ sentiment and market dynamics throughout the month. Early in May, US/China trade tensions eased following an agreement to implement a 90-day tariff reduction. This temporary reprieve sparked a rally in the stock market, particularly benefiting sectors most exposed to tariffs. Despite this positive development in the US-China relations, President Trump escalated his rhetoric against the European Union by threatening to impose 50% tariffs on European goods unless progress was made toward a US/EU trade agreement. The market largely dismissed this announcement as a negotiating tactic and continued to nudge upwards.

Toward the end of the month, the US Court of International Trade (CIT) ruled that Trump’s broad use of the International Emergency Economic Powers Act (IEEPA) to impose tariffs was unauthorised. The administration promptly appealed the decision and, for the time being, tariffs remain in effect following a stay granted by the Court of Appeals on the CIT ruling.

As previously noted, the healthcare sector faced significant headwinds in May. The S&P 500 Health Care Index underperformed its broader counterpart by nearly 12%, making it the worst relative monthly performance in more than 25 years. Several factors contributed to this pronounced underperformance. First, despite encouraging developments in broader trade negotiations, the US administration initiated an investigation under Section 232 of the Trade Expansion Act into the potential to impose tariffs on pharmaceutical products. Second, Trump signed an executive order directing the Secretary of Health and Human Services to establish ‘most-favoured-nation’ (MFN) price targets for pharmaceutical manufacturers, aiming to align US drug prices with those of comparably developed countries. Due to the absence of specific implementation details, the precise impact of MFN pricing on corporate earnings remains uncertain. However, it would be a clear negative development for the industry, with ramifications that would impact not just pharmaceutical and commercial biotechnology companies’ earnings, but the whole healthcare ecosystem (early-stage discovery, large R&D decisions etc). Last, unhelpful news from two sector bellwethers – UnitedHealth Group, which announced its CEO’s resignation and withdrew forward guidance, and Eli Lilly, which reported disappointing Q1 results – further exacerbated the already challenging sentiment in the healthcare sector.

Fund performance

The Company’s NAV decreased by -2.2% in May, ahead of its benchmark, the MSCI All Country World Daily Net Total Return Health Care Index, which was down 4.4% for the month.

Positive contributors relative to the benchmark in May were Insulet, Merus and Sandoz Group.

Merus presented highly promising clinical data for its asset, petosemtamab, for the treatment of head and neck cancer.

The key driver behind the positive performance for all three was a strong set of 1Q25 financial results or positive pipeline developments. Starting with Insulet, the company delivered not just robust results for the quarter but also upgraded its outlook for FY25. Merus presented highly promising clinical data for its asset, petosemtamab, for the treatment of head and neck cancer. Finally, Sandoz Group produced a solid set of financial results, confirmed FY25 guidance and, importantly, offered comfort that it can absorb tariff pressure without deviating too much from its plan.

Negative relative contributors in the period under review were Cytokinetics, Globus Medical and Argenx.

May proved, yet again, to be a tricky month for Cytokinetics. The FDA postponed the approval decision date for key asset, aficamten, following a request for more data around the company’s proposed post-market patient-monitoring requirements. Globus Medical disappointed the market with a very lacklustre set of Q1 financial results, with weakness and challenges in multiple areas of the business. With many of the issues expected to be transient, the management team reiterated FY25 guidance but the market is understandably approaching that reiteration with an element of caution. Somewhat frustratingly, the market was disappointed with Argenx’s Q1 results, despite the company delivering results broadly in line with consensus expectations. With the fundamentals firmly intact, and the pipeline on track, we saw nothing to change the investment thesis.

We added a position in Danish biotechnology company Genmab, ahead of a potentially rich vein and clinical news flow. Coupled with an attractive valuation, the near and medium-term risk/reward feels attractive.

Outlook

There is no hiding from what has been a dynamic and challenging backdrop for healthcare investors, with the threat of sector-specific tariffs and potential pressure on drug prices in the US as two key areas of uncertainty. However, it is worth reflecting on three things that offer cause for optimism. First, we believe investing during periods of high policy uncertainty can generate attractive returns. Second, the biopharmaceutical industry does not appear to be wavering in its commitment to either R&D investment or business development, a statement underpinned by an ongoing cadence of positive news flow, licensing deals and M&A. Last but not least, the healthcare industry is incredibly diverse, offering interesting investment opportunities despite the near-term, and hopefully transient, regulatory and political uncertainty.