By Karen Langley
The 2020 election is still more than a year out, but one sector
is already feeling the electoral heat: health-care stocks.
The group has been among the worst-performing sectors in the
S&P 500 this year, rising just 3.9%, compared with an 18% gain
for the index. Only the energy segment has fared worse, up less
than 1% in 2019.
Although health-care stocks are often considered defensive
investments that tend to hold up during economic turmoil, they can
be vulnerable to any perceived changes in government policy. Some
of investors' recent squeamishness coincides with a climb in the
polls by the progressive presidential candidate Elizabeth
Warren.
One of her competitors, Bernie Sanders, has proposed a Medicare
for All plan that would move every American to a government-run
health-insurance plan regardless of whether they have insurance
through his or her employer. The plan, which Ms. Warren has
endorsed, could effectively eliminate health insurers'
business.
Shares of those companies are deep in the red this year. Centene
Corp. is off 24%, Cigna Corp. has slumped 20%, UnitedHealth Group
Inc. is down 11% and Anthem Inc. has fallen nearly 11%.
Daniel Clifton and Courtney Rosenberger at Strategas Securities
found the underperformance of health-insurance stocks tracks the
probability of Ms. Warren or Mr. Sanders clinching the Democratic
nomination, as measured by the online prediction market PredictIt.
Mr. Clifton, the firm's head of policy research, noted the stocks
stabilized in late spring and early summer when former Vice
President Joe Biden entered the race as the favorite but have since
stumbled.
Mr. Biden, who is considered a moderate Democrat, has supported
building on the Affordable Care Act with a public health-insurance
option, such as Medicare, which would compete with private
insurers.
"The equity market does not see Biden as a real threat to
private insurance, the way you would Bernie Sanders or Elizabeth
Warren," Mr. Clifton said.
The research firm CFRA earlier this month suggested investors
reduce their exposure to the health-care sector, saying the group
will likely face increasing political risks as the election cycle
progresses.
"Statements that health care will be socialized, Medicare for
All, combined with pressure from the Republicans on pharmaceutical
cost controls and so forth" are adding pressure, said Sam Stovall,
CFRA's chief investment strategist.
Health-care-focused mutual and exchange-traded funds, which are
popular with individual investors, have recorded a net $13 billion
in outflows this year through September, Morningstar Direct data
show. That is the largest exodus among the 16 sector categories
Morningstar tracks and compares with $1.5 billion of inflows in all
of last year. Investors also bailed from the funds during the last
presidential election cycle when they pulled a net $21.7 billion in
2016.
At the same time, hedge funds have appeared to view the recent
weakness as a buying opportunity. About 18% of the net weight of
their assets -- the largest exposure -- are in the sector,
according to Goldman Sachs data through June 30. Technology came in
second at 16%.
Within the health-care sector, hedge funds increased their
weighting toward pharmaceuticals and health-insurance stocks, which
Goldman noted are the industries most exposed to policy risk.
To be sure, valuations in the sector are more enticing after the
recent selloff. Health-care stocks in the S&P 500 are trading
at about 14.4 times future earnings, compared with 16.8 times for
the broader S&P 500 and 19.6 times for the tech sector,
according to FactSet.
Industry executives are increasingly finding themselves in the
hot seat as candidates who support major changes to health policy
gain traction among primary voters.
At a conference in September, Andrew Witty, chief executive of
UnitedHealth's Optum health-services arm, acknowledged that
individuals and businesses are fed up with the cost of health care
and the industry needs to assess how to lower costs without
compromising quality.
"I think the private sector needs to work as hard as it can to
demonstrate to the politicians that when we apply our tools and our
mindset, we can get a grip" on this, he said, according to a
FactSet transcript.
A representative of UnitedHealth declined to comment
further.
Of course, there is a variety of possible electoral and policy
outcomes.
Investors have to assess how likely it is that the major
health-care changes discussed in the Democratic primary will
actually be made into law, said Amy Kong, senior portfolio manager
at Fiduciary Trust Company International.
"If you believe it won't happen, it makes for an interesting
opportunity to buy into some of those sectors that have been
weakened because of political rhetoric," she said.
In addition to the health insurers, shares of pharmaceutical
companies including Mylan NV and Pfizer Inc., along with
biotechnology companies such as Biogen Inc. and AbbVie Inc., have
suffered double-digit percentage declines this year. Others, such
as the device companies Edwards Lifesciences Corp. and Stryker
Corp., have gained more than 30%.
"Until you get through the 2020 election, until you see,
particularly, what both houses of Congress look like, it's really
hard to prognosticate what those outcomes could be," said Douglas
Cohen, managing director for portfolio management at Athena Capital
Advisors.
Mr. Cohen said his firm has selectively reduced client exposure
to the health-care sector, particularly to some drugstores,
distributors and insurance companies.
"Right now is kind of the point of essentially maximum
uncertainty as it pertains to politics for 2020," he added.
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Write to Karen Langley at Karen.Langley@wsj.com
(END) Dow Jones Newswires
October 15, 2019 08:14 ET (12:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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