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Weekly Manager Views

17 January 2020

At GAM Investments’ Weekly Investment Meeting held on 15 January, the speakers were Christophe Eggmann, who commented on the pace of innovation in the healthcare sector, and Gianmarco Mondani, who shared his views on European equities from a non-directional perspective.

Healthcare Equities

Christophe Eggmann

  • To assess how much political risk is priced in for this year’s election, we feel it is important to look at the events of last year. 2019 began with the surprise of Bristol-Myers Squibb announcing its acquisition of Celgene, followed shortly by relative disappointment when no significant deals were announced during JP Morgan’s annual healthcare conference. After January, markets demonstrated premature concern for the 2020 US presidential election, a full 18 months prior to election day. The possible nomination of Democrat candidates such as Bernie Sanders and Elizabeth Warren, who display a preference for universal healthcare and stricter regulation, contributed to the sector’s underperformance. By this point in 2020, though, we feel that election risks are understood by the market and therefore any shocks should be minimised in the near future.

  • Regardless of politics, we remain focused on four key areas of interest for 2020. First, we find depression to be a potential market where there will be substantial activity, as 2020 could see approval of the first new therapy in over 20 years. Second, we anticipate that gene therapy and gene editing will expand outside their current niche orphan markets. Third, we believe we will continue to see developments in oncology, including improvements to cell therapies that train the body’s immune system to target cancer cells. Fourth, dementia and Alzheimer’s are both diseases that science hopes to slow, if not stop entirely, and 2020 is shaping up to be a revolutionary year for those diseases.

  • Capital markets remained vibrant in 2019, which we believe speaks to the attractiveness of the sector. Companies that held initial public offerings gained, on average, 36%, and follow-on offerings were close to their record levels of 2018. By the end of the year, M&A had begun to increase, with companies willing to pay a premium of up to 300%.

  • Overall, we feel that technology is vital to the healthcare sector, which has advanced exponentially in recent history. For example, 100 years ago, diabetes was essentially a death sentence. As recently as the 80s, synthetic human insulin was far from perfect. Today, diabetics can enjoy almost entirely normal lifestyles. Using gene editing, we can hope to cure diabetes entirely one day soon. From an investor standpoint, we anticipate that the pace of innovation will continue to increase, and we retain high expectations for the development of the sector.

Developed Europe Long / Short Equity

Gianmarco Mondani

  • European equities performed strongly in 2019 despite earnings downgrades, weakening of macroeconomic indicators throughout the year and the presence of high risk external factors (China / US trade war and Brexit). More recently, however, certain leading indicators are suggesting that the European economy may be bottoming out from historically low levels. This could be a reflection of the reduced risk of a no-deal Brexit and preparations for a partial agreement on China / US trade. It is difficult to predict whether improving forward looking indicators will lead to significant economic growth against the back drop of a late-cycle US economy, for example.

  • Consensus earnings estimates from analysts point to 10% growth for the average European company in 2020. In our view, this is too high. Indeed the same happened in 2019, when expectations were cut gradually through the year from 10% growth to -1%. As a consequence, we believe it is likely that majority of European company earnings statements will disappoint this year. As a result, selectivity is important. Among cyclicals, we see some early signs of improvement, however, in our view, it remains too early to buy cyclical companies in the midst of fundamental troubles (eg profit warnings) in the hope of a recovery. We instead prefer select names with a good mix of valuations and early signs of improvements (certain banks and construction stocks). Aside from this, we continue to be long stocks (luxury, technology, defence, renewable energy) with ample visibility on their earnings and with the ability to grow favourably even if the economy does not accelerate.

  • On the short side, we continue to focus on companies facing both structural and cyclical pressures. We identified two new themes recently. Among staples, we have seen the emergence of margin pressure stemming from the realisation that top-line growth is suffering from a practice of excessive saving over the last few years. We also note reduced regulated returns among utility stocks sensitive to falling risk free rates, among which airport operators stand out.

  • If an equity market downturn / correction occurs, simply hedging long books with futures and indices may not be powerful enough for investors, in our view. It is difficult to generate alpha on long positions when everybody is selling stocks. Therefore, we believe delivering alpha with a short book is crucial during stock market declines.

Important legal information
Source: GAM unless otherwise stated. The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or advice. Reference to a security is not a recommendation to buy or sell that security. The companies mentioned were selected from the universe of companies covered by the portfolio managers to assist the reader in better understanding the themes presented. The companies included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers.
January 2020