Hiding from the Bear Part 2

VT Tyndall North American Fund

Hiding from the Bear Part 2

I wrote last time about the ongoing bear market in growth stocks and the importance of having exposures that aren’t solely comprised of expensive tech companies and growthy consumer discretionary names. In our opinion, the time for these stocks has now passed and as we now hit the toughest comps ever for these sectors, I believe it’s important to focus on the road less travelled in the US equity market. We talked previously about Consumer Staples as a port in the storm, this week I would highlight Healthcare as an interesting sector in these very difficult times.

Healthcare is typically seen as a defensive sector, as the need for healthcare is non-cyclical. True, but the devil is in the detail. Some areas within Healthcare have been huge beneficiaries of the Covid recovery and as Covid testing ebbs away and the hockey stick growth of the vaccines rolls over, these are not the places to be. But there are some overlooked corners of this sector which have held up well in the recent sell off, areas like Pharmaceuticals. We currently own Bristol Myers Squibb for example, which is on a PE of 8.9x with a dividend yield of 3.1%. It has a full pipeline with several data read outs this year. It has a strong balance sheet and will generate $40-$50bn of free cash flow in the next two years, allowing plenty of scope for bolt on acquisitions in addition to the already announced 10% dividend increase and $15bn stock buyback. Bristol is up almost 12% year to date, which is notable when the many US indices are down double digits in the same period.

There is another angle here too, within the Healthcare sector. We are in a midterm election year, and these have historically been times when the electorate displays its disappointment in the President and party elected two years prior. This almost always means that the incumbent party loses seats in the House or Senate, or both, and there is an equalisation of power in Congress.

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The two occasions in the last 100 years when a sitting President’s party has not lost seats in the midterms were FDR in the Great Depression and George W Bush post-9/11.
Currently, the Democrats have a majority in the House and Senate, but the Republicans only need 5 seats to take the former. On average, the midterm incumbent loss is 29 seats and, with his current approval rating so low, Biden is on course to lose 44 seats. This is a positive for the Healthcare sector as it greatly reduces the likelihood of new policy being enacted, which has helped the sector to outperform in 8 of the last 10 midterm years, with an average spread of 8% over the S&P 500.

The issues that American voters care about most right now are inflation and the price of gasoline. President Biden is not going to score well on either and we should expect a swing to the Republicans next November.

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A shift in power away from the Democrats has historically proved to be a very positive factor for the Healthcare sector, which is why we currently carry an overweight and are selectively buying stocks that should benefit from this dynamic and offer performance when other sectors may not.

17th March 2022
Read time : 4  mins

This content is intended for professional clients only.

Data source: Strategas Research Partners
Not for retail distribution – this document is intended for professional clients only
Disclaimer

WARNING: All information about the VT Tyndall North American Fund(‘The Fund’) is available in The Fund’s prospectus and Key Investor Information Document which are available free of charge (in English) from Valu-Trac Investment Management Limited (www.valu-trac.com). Any investment in the fund should be made on the basis of the terms governing the fund and not