Market and sector review
March was a challenging month for equity markets globally on the back of heightened geopolitical tensions which resulted in a spike in oil prices and a consequent increase in bond yields. Unsurprisingly, the energy sector performed especially well while sectors that historically correlate negatively to sudden rises in interest rates, such as consumer staples, industrials and healthcare, struggled.
Geographically, emerging markets and European stocks lagged their US counterparts, partly due to a stronger dollar and the view that the US economy is more self-sufficient in terms of energy requirements. As hinted above, the healthcare sector underperformed the broader market with pharmaceuticals, biotechnology, life sciences tools and services posting less negative returns relative to healthcare distributors, facilities, equipment and supplies.
Equity market performance during the month was shaped largely by developments in the Middle East. Following the 28 February US/Israeli strikes on Iran, the conflict continued through March and shipping flows through the Strait of Hormuz fell sharply, severely disrupting global energy markets. Brent crude rose by more than 60% over the month, while bond yields moved materially higher as investors reassessed the inflation outlook.
In response, many looked back to earlier oil shocks, including the 1973 Arab embargo, the 1979 Iranian revolution, the 1990 Gulf War and the 2022 Russia/Ukraine conflict, to see which playbook central banks might adopt this time. It became increasingly clear that the easing narrative which began to take hold last year is no longer intact. On 18 March, the Federal Reserve left interest rates unchanged while adopting a more hawkish tone as energy-driven inflation risks intensified. The following day, the ECB also stayed on hold, warning that the conflict had introduced both upside risks to inflation and downside risks to growth. For now, with no visibility on how long the conflict will persist or how quickly normal shipping can resume through Hormuz, central banks appear to be in risk-management mode, trying to balance inflation control against the danger of placing further strain on an already slowing global economy and softening labour market.
Against that backdrop, healthcare’s underperformance relative to the broader market may seem counterintuitive, given its reputation as a defensive sector. In practice, however, investors often treat healthcare as a bond proxy. When oil prices rise sharply and inflation expectations move higher, bond yields tend to increase which can weigh on both bond prices and other yield-sensitive sectors such as healthcare. That said, if the current inflation shock proves predominantly supply-driven and begins to undermine growth, prompting more stagflationary concerns, sentiment could shift. In that environment, healthcare’s resilient earnings profile and relative defensiveness may once again become more attractive to investors.
Fund performance
The Company’s net asset value (NAV) declined by 8.2% in March, behind the benchmark, the MSCI All Country World Net Total Return Health Care Index, which was down 6.4% for the month (both figures in sterling terms).
Positive relative contributors relative to the benchmark in March were BridgeBio Pharma, Cytokinetics and Nuvalent.
Importantly, however, that uncertainty has created exciting investment opportunities, with current valuations disconnected from the strong fundamentals. The innovation cycle remains very strong and M&A is picking up, with several multi-billion-dollar deals announced since the turn of the year.
BridgeBio Pharma performed strongly, thanks to a combination of good commercial momentum as shown in its Q4 earnings report and positive data from one of its pipeline drugs, BBP-418, a potential first-in-class treatment for limb-girdle muscular dystrophy – a rare genetic disease that causes muscle weakening and wasting. Additionally, there were favourable legal developments which meant generic competition from a competitive asset might be delayed
Cytokinetics and Nuvalent both performed well without delivering any thesis-changing news but were caught up in the positive sentiment driven by encouraging pipeline developments and M&A.
Negative relative contributors included Centene, Johnson & Johnson and Chugai Pharmaceutical (Chugai).
At a broker conference, US managed care company Centene reiterated full-year 2026 guidance, but the weakness was caused by a comment that the company is seeing higher utilisation patterns in specialty pharmacy, an observation isolated to the company’s silver-tier plans.
The Fund had no exposure to Johnson & Johnson, a stock that continues to rerate given its defensive qualities. Chugai’s disappointing performance was driven by the company’s decision to discontinue the development of a pipeline asset for two rare muscular disorders, spinal muscular atrophy and facioscapulohumeral muscular dystrophy.
We initiated a position in Xenon Pharmaceuticals, a US-based biotechnology company, following the release of positive top-line data for its lead asset for the treatment of focal onset seizures, the most common type of epilepsy seizure.
Outlook
Geopolitical unrest in the Middle East and the inflationary implications of a spike in energy costs has created a great deal of uncertainty for investors. Importantly, however, that uncertainty has created exciting investment opportunities, with current valuations disconnected from the strong fundamentals. The innovation cycle remains very strong and M&A is picking up, with several multi-billion-dollar deals announced since the turn of the year.
The demand for healthcare products and services continues to be robust, with emerging markets especially buoyant. Last, but not least, policy fears in the US appear to be easing which is a significant positive that should not be overlooked.
