Future Returns: Opportunity in Global Healthcare
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Future Returns: Opportunity in Global Healthcare

Strategists at Citi believe the sector is inexpensive and worth a look.

By Abby Schulz
Fri, May 14, 2021 11:25amGrey Clock 4 min

The shares of healthcare companies often aren’t the first to take off when the economy recharges, but strategists at Citi believe the sector is inexpensive and worth a look.

Citi Private Bank shifted a recommendation that investors overweight their stock allocation to global healthcare by 2% to 4% in late April. That means healthcare now represents half of the bank’s recommended 8% overweighting to global stocks, making it a substantial bet.

Typically healthcare “is a more defensive asset,” says David Bailin, chief investment officer and global head of investments at Citi Global Wealth. But the bank is making this bet because “healthcare looks unusually cheap.”

Shares in healthcare companies have risen only by 15% since the end of 2019, including a 5% gain for the year through mid-April—a significant lag to the double-digit gain in the S&P 500 in that time period, according to Cit Private Bank’s April 22 global strategy report. These subdued gains are despite a valuation discount of 25% to the broad S&P 500 index, Citi said.

Also, in the U.S., the sector trades at a 30% forward price-to-earnings ratio discount to the S&P 500, the bank said.

Some of the relative drag on the sector could be related to worries about potential regulation. Proposals mentioned since the Democratic primaries have included regulation of drug prices and an overhaul of the U.S. insurance system, Bailin says.

But, he adds, “talk about actual legislation so far includes increased subsidies to fund long-term care as well as enhancements to the Affordable Care Act subsidy regime—not cutbacks.” There’s also no call for healthcare reform.

“Given that we see the Biden proposal as a ceiling, not a floor, to what can actually be passed in the current Congress, we view the odds of major healthcare regulation that would constrict the growth of healthcare revenues as lower than what the market is currently pricing,” Bailin says.

The reason to tilt to healthcare is to gain exposure to global growth, exposure to stocks with high dividend yields, and exposure to what Citi views as an “unstoppable trend”—the demographic shift within many countries to older populations that have the money to spend on the healthcare they increasingly need.

Penta recently spoke with Bailin about where the opportunities in healthcare are.

Why Is Healthcare Undervalued?

Healthcare historically trades at a lower valuation to the market, but always at a correlated lower valuation. Since the market bottomed in March 2020, however, stocks have been driven to lofty levels by growth sectors, such as technology—a trend that stumbled on Monday as the Dow sank 500 points.

But during this period, over the last 15 months, healthcare stocks “did not inflate,” Bailin says. Their valuations remained “within a channel of normality,” yet relative to everything else, they’re “under-appreciated,” he says.

One interesting note about healthcare is that the sector hasn’t ever had a down year in revenues or earnings—even during the years of the financial crisis, 2008-09—since the late 1980s. “How much would you pay for that consistency? Right now, you’d pay a lot,” Bailin says.

Also, the bank’s strategists note in the April report that the sector has not been a bad place to be when markets slide. “Healthcare has historically fallen the least among market segments during corrections,” the report said.

Which Sectors to Focus On? 

In terms of specifically where to invest, Citi wrote that “the long-term case” for spending on healthcare “rests on aging demographics, rising income levels in emerging market countries, and tremendous innovation in vaccines, gene therapy, med-tech, wearables, Alzheimer’s treatments, and much more.”

One company that will benefit from current demographic shifts, for instance, is San Diego-based Dexcom, which develops, makes, and distributes monitoring systems for diabetes.

Biotechnology and biopharmaceutical companies also should benefit, given the important role these companies play in drug discoveries and treatments.

To capture global growth—and high dividend yields—Citi recommends companies such as Chicago-based biopharmaceutical AbbVie (with a 4.5% dividend yield), and companies listed on exchanges outside the U.S., where stocks are slightly less expensive, Bailin says. An example of the latter is Paris-based multinational pharmaceutical company Sanofi, which also has a high dividend yield of 3.7%.

Citi also likes companies creating healthcare delivery systems, such as telehealth—services that allow patients to interact virtually with their health-care practitioners.

“There are a whole bunch of companies that are changing the delivery modality to moving away from the hospital and away from the office,” Bailin says. “We think this will happen with many sectors.”

Also worth a look are companies involved in medical devices, robotic surgery, or “anything that creates better decisions,” he says.

Intuitive Surgical, for example, is the leader in robotic-assisted surgeries, Bailin says. It “continues to expand into new surgical indications, and the [total addressable market] is enormous.”

In the wake of the pandemic, Bailin expects some pharmaceutical companies and companies focused on physician-administered therapies and vaccines will get a boost temporarily as people return to the doctor for the first time in more than a year.

“Instances of disease are lower, but it doesn’t mean they actually are lower—they are just not reported,” Bailin says. “We have a bunch of catch-up over the next 12-to-24 months to [get] back to baseline interaction with healthcare providers.”

New Jersey-based Merck, for instance, could benefit “given that its oncology and vaccines are a significant percentage of revenue,” he says.

What About Technology? 

While the technology sector had a bad day on Tuesday as the market rotated out of growth stocks, investors may not be ready to abandon hot tech names just yet. In announcing the tactical shift higher in healthcare, Citi noted that investors who followed their recommendation would still have plenty of exposure to technology.

Investors who follow Citi’s recommended 60% allocation to global stocks as defined by the investable MSCI All Country World Index will have 12.6% of their portfolio invested in technology, according to Citi. The recommendation to increase healthcare to a 4% overweight will lead to an 11.2% exposure.

“For decades the sector has carried some modicum of political and headline risk,” Citi wrote. “But that has yet to upend an enviable record of positive revenue growth. Steady revenue growth at a deep valuation discount is the type of script we like.”

Reprinted by permission of Penta. Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: May 11, 2021



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New York Watch Auctions Record Uptick in Sales in the Face of Market Slowdown
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Luxury watch collectors showed ongoing strong demand for Patek Philippe, growing interest in modern watches and a preference for larger case sizes and leather straps at the June watch sales in New York, according to an analysis of the major auctions.

Independent and neo-vintage categories, meanwhile, experienced declines in total sales and average prices, said the report from  EveryWatch, a global online platform for watch information. Overall, the New York auctions achieved total sales of US$52.27 million, a 9.87% increase from the previous year, on the sale of 470 lots, reflecting a 37% increase in volume. Unsold rates ticked down a few points to 5.31%, according to the platform’s analysis.

EveryWatch gathered data from official auction results for sales held in New York from June 5 to 10 at Christie’s, Phillips, and Sotheby’s. Limited to watch sales exclusively, each auction’s data was reviewed and compiled for several categories, including total lots, sales and sold rates, highest prices achieved, performance against estimates, sales trends in case materials and sizes as well as dial colors, and more. The resulting analysis provides a detailed overview of market trends and performance.

The Charles Frodsham Pocket watch sold at Phillips for $433,400.

“We still see a strong thirst for rare, interesting, and exceptional watches, modern and vintage alike, despite a little slow down in the market overall,” says Paul Altieri, founder and CEO of the California-based pre-owned online watch dealer BobsWatches.com, in an email. “The results show that there is still a lot of money floating around out there in the economy looking for quality assets.”

Patek Philippe came out on top with more than US$17.68 million on the sale of 122 lots. It also claimed the top lot: Sylvester Stallone’s Patek Philippe GrandMaster Chime 6300G-010, still in the sealed factory packaging, which sold at Sotheby’s for US$5.4 million, much to the dismay of the brand’s president, Thierry Stern . The London-based industry news website WatchPro estimates the flip made the actor as much as US$2 million in just a few years.

At Christie’s, the top lot was a Richard Mille Limited Edition RM56-02 AO Tourbillon Sapphire
Richard Mille

“As we have seen before and again in the recent Sotheby’s sale, provenance can really drive prices higher than market value with regards to the Sylvester Stallone Panerai watches and his standard Patek Philippe Nautilus 5711/1a offered,” Altieri says.

Patek Philippe claimed half of the top 10 lots, while Rolex and Richard Mille claimed two each, and Philippe Dufour claimed the No. 3 slot with a 1999 Duality, which sold at Phillips for about US$2.1 million.

“In-line with EveryWatch’s observation of the market’s strong preference for strap watches, the top lot of our auction was a Philippe Dufour Duality,” says Paul Boutros, Phillips’ deputy chairman and head of watches, Americas, in an email. “The only known example with two dials and hand sets, and presented on a leather strap, it achieved a result of over US$2 million—well above its high estimate of US$1.6 million.”

In all, four watches surpassed the US$1 million mark, down from seven in 2023. At Christie’s, the top lot was a Richard Mille Limited Edition RM56-02 AO Tourbillon Sapphire, the most expensive watch sold at Christie’s in New York. That sale also saw a Richard Mille Limited Edition RM52-01 CA-FQ Tourbillon Skull Model go for US$1.26 million to an online buyer.

Rolex expert Altieri was surprised one of the brand’s timepieces did not crack the US$1 million threshold but notes that a rare Rolex Daytona 6239 in yellow gold with a “Paul Newman John Player Special” dial came close at US$952,500 in the Phillips sale.

The Crown did rank second in terms of brand clout, achieving sales of US$8.95 million with 110 lots. However, both Patek Philippe and Rolex experienced a sales decline by 8.55% and 2.46%, respectively. The independent brand Richard Mille, with US$6.71 million in sales, marked a 912% increase from the previous year with 15 lots, up from 5 lots in 2023.

The results underscored recent reports of prices falling on the secondary market for specific coveted models from Rolex, Patek Philippe, and Audemars Piguet. The summary points out that five top models produced high sales but with a fall in average prices.

The Rolex Daytona topped the list with 42 appearances, averaging US$132,053, a 41% average price decrease. Patek Philippe’s Nautilus, with two of the top five watches, made 26 appearances with an average price of US$111,198, a 26% average price decrease. Patek Philippe’s Perpetual Calendar followed with 23 appearances and a US$231,877 average price, signifying a fall of 43%, and Audemars Piguet’s Royal Oak had 22 appearances and an average price of US$105,673, a 10% decrease. The Rolex Day Date is the only watch in the top five that tracks an increase in average price, which at US$72,459 clocked a 92% increase over last year.

In terms of categories, modern watches (2005 and newer) led the market with US$30 million in total sales from 226 lots, representing a 53.54% increase in sales and a 3.78% increase in average sales price over 2023. Vintage watches (pre-1985) logged a modest 6.22% increase in total sales and an 89.89% increase in total lots to 169.

However, the average price was down across vintage, independent, and neo-vintage (1990-2005) watches. Independent brands saw sales fall 24.10% to US$8.47 million and average prices falling 42.17%, while neo-vintage watches experienced the largest decline in sales and lots, with total sales falling 44.7% to US$8.25 million, and average sales price falling 35.73% to US$111,000.

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