COVID-19 Impact: AXA IM’s macroeconomic and investment strategy update – biotechnology and healthcare special
The COVID-19 crisis continues to cause significant volatility. This is an exceptional and defining time for the global economy, but policymakers and central banks are taking decisive action to steady markets and the macroeconomic backdrop. Our investment experts outline their current views on the situation, explain what they expect could happen from here and highlight where there could be opportunity…
AXA Group Chief Economist, Gilles Moëc:
We are starting to get traditional data through, covering the state of advanced economies under lockdown. US GDP fell by 1.2% quarter-on-quarter in the first quarter, or 4.8% annualised. Of course, it is a spectacular decline, but “mechanically” a two-week lockdown in the second half of March would have normally yielded an even bigger drop, at circa 5% quarter-on-quarter. This probably reflects a milder lockdown than in many European countries.
But even in Europe, disparities have emerged. Judging by both real-time indirect indicators, such as mobility reports or electricity consumption, and traditional economic data, the ongoing recession in Germany may not be as bad as what Italy, Spain and France are facing.
This brings us to our main concern right now - cyclical divergence after the pandemic shock. In the euro area, member states such as Germany, which are having the mildest form of lockdown, are also those with significant policy space, and they are making full use of it to mitigate the contraction and fight any lasting collateral damage. Southern European countries have internalised the financial constraint and are providing smaller stimulus.
This would normally call for robust fiscal mutualisation across the Eurozone, but this has been quite elusive so far. This raises the pressure on the European Central Bank (ECB).
While Standard & Poor’s decision not to take Italian sovereign debt into junk territory has brought a respite, the central bank in our view will be forced to provide a bigger programme. This was not included in today’s announcement, where the ECB reduced the cost of its emergency loan programme for banks, but we believe ECB President Christine Lagarde kept that option open.
Elsewhere, we continue to monitor conditions in emerging markets very closely. Developing market currencies continue to struggle. We need to factor in the risk that the rebound in global economic activity upon exiting lockdown is likely to be impaired by a steep contraction in emerging market demand.
AXA IM Chief Investment Officer, Core Investments, Chris Iggo:
We can break down recent market moves into three phases. The first was the initial response to the outbreak of the coronavirus that led global equity markets to drop around 30% between 19 February and 23 March. Markets became disorderly, and liquidity dried up, until central banks announced massive credit and liquidity support.
The second phase was the relief rally between 23 March and around the second week of April. Many observers expressed surprise that equities were rallying when all around, people were revising down global GDP and corporate earnings, and revising up forecasts for corporate defaults in credit markets.
While there has been some evidence of infection rates peaking in some countries, it would not be true to say that this market rally was due to the all-clear being called on the pandemic. It was mostly about policy stopping financial markets falling apart and providing some basis for optimism that there would eventually be an economic recovery.
Over the last two weeks markets appear to have moved into a third phase, a new equilibrium. Returns have been flattish and market indicators such as credit spreads have stabilised. Equity market levels and credit spreads are reflecting worse fundamentals than before the crisis and higher risk premiums.
Government bond yields have settled into ranges defined by current central bank settings and expected forward guidance. Inflation break-evens have settled at levels consistent with the message that the short-to-medium term outlook is for lower inflation as a result of the global demand shock.
Credit spreads have retraced less than half the widening that they underwent in early March to reflect greater leverage and less secure cash-flows. With reduced dividends and share buy-backs to support equities, markets have settled at price levels that suggest much lower returns than those expected before the crisis.
Are markets at the right level given the economic hit? It’s hard to answer that - but forget what happened in phases one and two. Markets should know the economic damage, and they know that the policy support and risk-premiums - for the moment - reflect the greater uncertainty in the outlook.
For credit risks to reduce further and equities to sustain current levels as earnings announcements continue to be negative, we need a catalyst. Let’s look to the biotech and broader health sectors to see what the prospects are.
AXA IM's Biotech strategy portfolio manager, Linden Thomson:
All our lives have changed dramatically with the global spread of coronavirus. Understandably, biotechnology has taken much of the spotlight, as most believe it will be an effective treatment, and more likely an effective vaccine(s), that will ultimately allow life to return to normal.
Biotechnology equities have posted robust year-to-date gains. Following the dark shadow cast on the sector over recent years, by US political clamour to reduce drug prices, biotechnology is now enjoying a renewed focus in terms of its ability to innovate quickly, collaborate and potentially develop solutions to tackle COVID-19.
Although lockdowns are effective at reducing viral transmission and thereby the surge impact on intensive care units, they are not a long-term solution. Much work is being done by biopharma firms, in close collaboration with the Food and Drug Administration (FDA), to develop new or repurpose existing therapeutics for the treatment of COVID-19 or to prevent the disease. We expect a number of these opportunities to report clinical data over the next few months.
In the case of drugs to treat more severe patients we would anticipate positive data to allow for rapid approval and access for patients. As for vaccines, positive data will be very well received, but a more measured approach to approval and access is likely as vaccines are given to otherwise healthy people, so the risk benefit decision is different.
There are hundreds of drugs being investigated for coronavirus. The three main categories of drugs that we are focused on are antivirals, antibodies and vaccines. The first two are expected to be used to treat patients with COVID-19 while vaccines are to prevent disease. In our view, biopharmaceutical firm Gilead appears to be leading the way for antivirals, recruiting thousands of patients into trials for its drug remdesivir.
Although there has been much leaked information, we expect the first robust, controlled data to be released in May. Another firm, Regeneron, has an interesting product about to start clinical trials. It consists of a mixture of antibodies which hope to replicate an immune response to the virus as a treatment - this approach has precedent in the case of Ebola.
For vaccines the speed of development has surpassed all expectation with products already in humans from a standing start. While we remain optimistic, we are however realistic in terms of the speed that these can be introduced more broadly. The initial focus will be those at highest risk, assuming the data supports their use.
We have continually highlighted the strength of innovation in biotechnology – this is now very much a central global focus.
AXA IM's Healthcare and Longevity strategies portfolio manager, Dani Saurymper:
As the coronavirus pandemic has developed, we have been inspired by the coordinated response of healthcare providers, diagnostic testing companies and the biopharmaceutical industry. Companies are applying new technologies to this challenge with unprecedented results that highlight the strength of innovation across the entire healthcare arena. The unshakeable conclusion from the current crisis is that the demand for healthcare products and services will continue apace aided by ageing demographics, increasing morbidity from ‘lifestyle’ conditions such as obesity or diabetes and a growing need for cutting-edge technologies and therapies in preparation for future pandemics.
In the short term, demand has fallen for some areas of healthcare as a result of social distancing measures and the lockdowns. Patients and doctors have been forced to postpone appointments and procedures for non-urgent conditions. We have seen a significant fall in routine lab testing volumes as physician visits have ground to a halt and elective surgeries such as hip and knee replacements, dental implants or cataracts have stalled.
Over the long term however, demand for healthcare should normalise and spending on medical infrastructure in particular is likely to experience a short-term boost to ensure better preparedness for future pandemics. While many healthcare companies have withdrawn financial guidance for the year due to the virus outbreak, several industries have flourished as demand for their products and solutions have accelerated.
Just as remote working has been rapidly embraced, COVID-19 has accelerated the adoption of several new technologies such as telemedicine or remote patient monitoring. Digital visits can be used to diagnose non-emergency medical conditions like allergies, influenza, colds, fevers and rashes. Physicians can seamlessly also prescribe medications and send prescriptions to local pharmacies for pickup or delivery in the mail. Consequently, digital health companies like Teladoc, American Well and Doctors on Demand have seen strong adoption of their services as patients have embraced the use of virtual appointments as an alternative to face-to-face interactions to reduce the spread of COVID-19.
Similarly, Medtronic, Philips and Masimo along with several others have seen increased demand from Intensive Care Units for ventilators, monitors and sensors to help manage infected patients. New technologies have also been launched including a wearable wireless sensor that enables monitoring by clinicians of less severe patients in their home thus reducing the exposure of patients and doctors as well as preventing a surge in patients overwhelming emergency departments.
Healthcare and healthcare spending are constantly evolving - new treatment options that improve the standard of care change treatment outcomes and demand for different therapies. We focus on finding companies that invest significantly in research and development to develop solutions for conditions with high unmet medical need. We believe companies that succeed in solving the most complex healthcare challenges will find its products appreciated by patients, physicians and payers.
AXA IM's Longevity and Biotech strategies deputy portfolio manager, Peter Hughes PhD:
Companies with a high exposure to the theme of longevity are those most likely to see increasing demand for their products and services, due to the global ageing population. Healthcare is an important part of the longevity theme, because on average as we age, we consume more healthcare goods and services.
During the recent market volatility healthcare stocks have performed robustly, because we are facing a pandemic and the healthcare sector is seen as a key part of the solution to global health emergency. As such, high exposure to healthcare compared to the broad market has been a tailwind for the longevity theme.
Other parts of the longevity economy have not fared so well. Silver spending is an important aspect of the longevity economy and includes activities such as travel and leisure. The dramatic reduction in global travel as a consequence of the COVID-19 pandemic has been perhaps most visible in the cruise line industry, with the last major vessel now returned to port.
The key question is whether travellers believe going on a cruise is a safe activity after recent events. Previous crises faced by the cruise industry suggest demand will bounce back, but when and to what extent is unclear. Financial planning is another important activity for the silver spender.
Private banks and wealth managers’ share prices declined during the stock market volatility in the first quarter of 2020. But taking a long-term view, it seems certain that financial planning will remain an essential activity to unlocking the full benefits of a longer life, so we are not overly concerned about recent short-term movements.
One underappreciated aspect of the crisis is the potential for increased demand for health and protection insurance from consumers in countries with underdeveloped healthcare systems - particularly those experiencing significant COVID-19 outbreaks. We have seen weak share price performance from multiple insurers operating in this space, but over the long term this crisis may stimulate greater demand for their products.
Despite the outbreak, global populations continue to age, and we expect global life expectancies to creep higher over the long term, therefore although we may see some changes in consumption patterns post-COVID-19, the key drivers of the longevity economy remain intact.