Twelve weeks have passed since the World Health Organisation declared the COVID-19 outbreak as a public health emergency of international concern at the end of January. Despite that the exit plans from the momentary lockdown are emerging, investors are still struggling to understand the near-term growth outlook. In fact, companies are refraining from issuing guidance on their expected future performance, thereby highlighting the severe uncertainty clouding their future outlook.
While economic uncertainty remains high, non-cyclical sectors have gained investment interest during this period, including the healthcare sector which stands at the heart of this crisis.
To begin with, the Global Industry Classification Standard (GICS) subdivides the healthcare sector into two main industry groups, mainly the healthcare equipment and services industry and the pharmaceuticals, biotechnology and life sciences industry. Over the past three months, the European healthcare sector has recorded a relative outperformance of approximately 20 per cent compared to the general market, as represented by the Eurostoxx 50 Index.
On an industry level, the pharmaceutical industry recorded a three-month positive return, with announcements on COVID-19 treatment and vaccine developments lifting the industry higher.
From a fundamental perspective, the outperformance of the healthcare sector can be attributed to a number of key drivers. Primarily, the unprecedented global health crisis has brought into focus the capacity constraints as healthcare systems struggle to meet the surge in demand for public health amid the coronavirus pandemic. The healthcare sector is often considered to be cyclically-neutral as business performance is not strongly correlated to economic performance. As the crisis itself is of a healthcare nature, the demand is even higher for specific companies.
From an earnings perspective, a look at the 2008 financial crisis indicates that downward revisions to earnings expectations for the healthcare sector were less evident than the overall market, supporting the view that earnings for the healthcare sector are more insulated to weather a systematic economic downturn. Moreover, shareholder returns are boosted by a historic trend of high dividend payout ratios (50 per cent+), and a healthy free cash flow yield, to sustain the dividend payment.
In Europe, dividend payout ratios for the healthcare sector were maintained at 50 per cent+ even during the 2008 financial crisis and since then have recorded sustainable growth, climbing up to 68 per cent in 2019. Given the low leverage levels at sector level and strong cash generation ability, dividends are more likely to be sustained relative to dividend payments in other sectors.
Focusing on the pharmaceutical space, there are a number of pharmaceutical and biotech companies which are focusing their capital and resources to develop a COVID-19 treatment or vaccine. The effort in containing this health crisis is evidenced across the whole industry with both pharma giants and smaller companies, including Moderna, Novavax and BioNTech communicating their developments.
So far, Gilead Sciences Inc has received the highest support from the WHO following its statement that Remdesivir, a novel antiviral drug, is the most promising anti-COVID-19 treatment. The company is undergoing multiple clinical trials to determine the safety and efficacy of the drug, and has already started working on ensuring a supply chain for large scale production. While this is important from a public health perspective, clinical trial developments are also boosting investment returns both on an industry level and the healthcare sector overall.
Disclaimer: This article was issued by Rachel Meilak, CFA equity analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.