Argo Investments sees recovery coming for underperforming health stocks

Argo Investments is running the rule over out-of-favour healthcare stocks, which have failed to keep up with the surge in the broader sharemarket.

Argo Investments managing director Jason Beddow.

Argo Investments is running the rule over out-of-favour healthcare stocks, which have failed to keep up with the surge in the broader sharemarket.

Rising interest rates, structural concerns over competing products and innovations, and the fallout from Covid-19 have weighed on investor sentiment towards healthcare companies, which are typically regarded as defensive investments that prosper during periods of economic uncertainty.

Argo Investments managing director Jason Beddow said that while there were short-term challenges facing many healthcare companies in the Australian market, the underlying fundamentals – including ageing populations in Australia and the US – remained strong.

The company’s bullish view was shared with investors this week during a series of shareholder information meetings in Melbourne, Adelaide, Brisbane and Sydney.

“We’ve called out healthcare which we think is interesting, because in a market that’s at record highs a lot of those stocks have been big laggards,” Mr Beddow told The Australian.

“Some deservedly so, don’t get me wrong, but it’s been an underperforming sector. Trying to sift through some of these businesses as they still normalise out of Covid – patient behaviour, government funding, etc – we think that’s an interesting space.

“I think they’ve all collectively been pretty disappointing – even the better ones – so we think that’s potentially a fertile market to at least do some more work.

“I think that’s probably where we’re spending a fair bit of time and where we could deploy some capital.”

Healthcare stocks make up around 10 per cent of Argo’s $7bn portfolio, which currently includes holdings in companies including CSL, ResMed, Ramsay Health Care and Sonic Healthcare.

All four companies have underperformed the S&P/ASX 200 Index over the past 12 months, trading at lower values to a year ago while the broader index trades at near record highs.

The promise of Ozempic and easier access to weight-loss treatments prompted investors to sell off ASX-listed healthcare companies last year, including CSL and ResMed, which generate revenue from patients suffering with conditions linked to obesity.

However, shares in both companies have since recovered as concerns over the threat of competing products eased.

Meanwhile, Sonic Healthcare cut its profit forecast last week by more than $100m, with inflationary pressures, currency exchange headwinds and slower than expected benefits from margin improvement measures blamed.

The company said earnings were likely to come in at about $1.6bn, down from earlier forecasts of $1.7-$1.8bn.

On the broader market rally, Mr Beddow said it was difficult to predict whether higher valuations could be sustained given the uncertainty over global interest rates and how future movements would flow through to the big banks and commodity prices.

“The banks have all just reported OK results but they were all down and that’s 25 per cent of the market,” he said.

“Resources – they’re are a bit harder to predict but commodity prices are on a real tear at the moment and so if that continues, you’d be thinking maybe there’s resource upgrades which flows through the market.

“Earnings is one bit and then the other thing we were predicating a market rally on was significant rate cuts in the US – we haven’t seen that yet.

“So it looks a little stretched but there’s clearly a lot of money looking for homes and the Aussie market is shrinking.”

The market capitalisation of the Australian sharemarket is on track for a decline in the year to June, due to a lack of new IPOs and foreign takeovers of ASX-listed companies including CSR, Adbri and Alumina.

Mr Beddow said the rising pool of investors looking to deploy capital into a shrinking market could support valuations in the short term.

The Reserve Bank’s next move would also be key, according to Mr Beddow, who said that while tax cuts were likely to be slightly inflationary, it was becoming increasingly likely that rates would remain on hold until next year.

“I think they’re probably on hold for a while,” he said.

“You’d have to think that unemployment tickles up a little bit, but I don’t think that’s probably enough (for a rate cut).

“Equally, if inflation stays mid-3s and unemployment is still at 4 or 4.1 per cent, a rate hike is not out of the question.

“My personal view is the next move is next year, unless there’s some big change in the global setting. I certainly don’t think you’re going to get any interest rate relief this year – things would have to deteriorate pretty quickly.

“We think they’re on hold, so that probably doesn’t help the markets either way.”