Health Care

Health care equipment stocks are pulling back, but this is a correction from overbought levels rather than a trend change. Profit margin prospects remain upbeat. The surge in consumer spending at hospitals has encouraged an expansionist mindset, as highlighted by the surge in health care facility construction activity. The latter is highly correlated with medical equipment new orders, as a larger footprint will add to the volume of procedures performed over and above the increase from faster health care spending. Importantly, revenue gains also reflect global factors. U.S. medical equipment exports are set to return to a growth track, based on the upbeat message from the German IFO survey of medical equipment demand. Wage inflation is also in retreat, please see the next Insight. The ticker symbols for the stocks in this index are: BLBG: S5HCEP - MDT, ABT, DHR, BDX, SYK, BSX, ISRG, BAX, ZBH, EW, STJ, BCR, HOLX, VAR. bca.uses_in_2016_09_15_001_c1 bca.uses_in_2016_09_15_001_c1

The budding recovery in the S&P biotech index is likely to gather steam. Big pharma is desperate to replenish its drug pipeline, putting biotech equities back into play following a drawn out de-rating phase. This phenomenon is not limited to U.S. pharmaceutical companies, as European and Japanese firms are also racing to scoop up promising biotech assets. As a result, deal premia for coveted U.S. biotech companies have skyrocketed, hitting all-time highs (middle panel). Both the relative forward P/E and P/E/G ratios are sufficiently depressed to expect a wholesale re-rating as a low cost of capital and receptive markets embolden pharmaceutical companies to buy future growth (third panel). Bottom Line: We reiterate our recent boost to an overweight stance in the S&P biotech index. The ticker symbols for the stocks in this index are: BLBG: S5BIOTX - VRTX, CELG, GILD, AMGN, REGN, BIIB, ALXN, ABBV, BXLT. bca.uses_in_2016_08_24_001_c1 bca.uses_in_2016_08_24_001_c1

Health care equipment stocks are overbought relative to the broad market, and a corrective pullback is inevitable. We had been concerned that the latest leg up might represent the final outperformance phase for this group, given rising wage inflation and a cooling in revenue growth indicators, but our conviction in the longevity of the cyclical bull market has been reinforced. Medical equipment demand is accelerating on a number of fronts. Domestic uptake is being driven by a rising number of procedures, as evidenced by double-digit strength in consumer spending at hospitals. That is a sustainable trend given rising income growth and broader health insurance coverage. Medical equipment exports have also reaccelerated. That is notable because it has occurred within the context of a flat, rather than weak, U.S. dollar. The implication is that demand from abroad is also on the upswing, as confirmed by the surge in the German IFO survey of medical equipment orders. As a result, backlogs should continue to build, ensuring that output growth stays on a solid footing. We recommend staying overweight. The ticker symbols for the stocks in this index are: BLBG: S5HCEP - MDT, ABT, SYK, BDX, BSX, BAX, ISRG, EW, STJ, ZBH, BCR, VAR. Health Care Equipment: Correction, But No Trend Change Health Care Equipment: Correction, But No Trend Change

Shift to a small vs. large cap bias as a stealth way to play the overall equity market overshoot. The oversold bounce in banks is not worth chasing, and buy dips in medical equipment stocks.

The odds of an inflation "mini-scare" are rising, although deflationary tail risks from abroad cannot be dismissed.

With the broad market breaking out to new highs courtesy of flush liquidity conditions and rising risk appetite, the momentum-driven biotech group stands an excellent change of reclaiming previous relative performance highs. We upgraded the S&P biotech index to overweight a month ago because value had been fully restored and underlying fundamentals remained solid. For instance, demand-driven pharmaceutical pricing power gains remain intact, which is driving productivity improvement. Increased profit potential should attract renewed capital inflows and translate into higher share prices, especially now that the supply of biotech stocks is ebbing fast: biotech IPOs have cratered. Importantly, drug industry M&A activity remains robust, suggesting that the S&P biotech index has the potential for a re-rating. We reiterate our recent upgrade to overweight. The ticker symbols for the stocks in this index are: BLBG: S5BIOT- AMGN, GILD, ABBV, CELG, BIIB, REGN, ALXN, VRTX. Biotech Is Coming Back Biotech Is Coming Back

In successful investment analysis "less is more, and usually much more effective."

The S&P health care sector's diagnosis is encouraging, as there has been improvement on a number of fronts. Recent profit reports signal that top line growth is recovering smartly at a time when industry selling prices remain resilient. Bellwether JNJ's robust guidance may foretell of a broader trend for the sector. Thus, the valuation discount weighing on this laggard defensive sector is no longer warranted and this earnings season may serve as a catalyst for a re-rating in historically depressed relative valuations (bottom panel). Importantly, the brightening profit backdrop is signaling that industry dividend growth will remain sold, in marked contrast with that of the broad market (second panel). Persistent dividend growth will be increasingly appealing in a world where investors are starved for sources of stable income. Meanwhile, generationally low fixed income yields are sustaining the appeal of share buybacks and the sector's share count will continue to drift lower. That should underpin both EPS and relative performance (third panel). Bottom Line: We are reiterating our high-conviction overweight stance in the S&P health care sector. BLBG: S5HLTH bca.uses_in_2016_07_20_002_c1 bca.uses_in_2016_07_20_002_c1

Our <i>Cyclical Indicator Update</i> reveals that a defensive portfolio strategy remains the best bet to navigate the crosscurrents of stagnant profit/economic growth yet abundant global liquidity.

The combination of biotech stabilization and a health care facilities plateau argues for profit taking in our long/short trade between the two groups. We had exploited the valuation mismatch because hospital profit prospects were far superior to those of the biotech group, especially within the context of a soaring U.S. dollar. Now that the primary upward thrust in the currency has played out, the revenue playing field will shift to a more neutral setting, on the margin. Indeed, while hospital spending is still growing much faster than pharmaceutical exports, a proxy for relative top-line trends, pricing power has not followed suit. Against a backdrop of soaring hospital wage bills, especially relative to pharmaceutical wages, we are closing this pair trade for a profit of 10%. The ticker symbols for the stocks in both indexes are: BLBG: S15HCFA - HCA, UHS, WOOF, AMSG, LPNT, THC, CYH, SCAI, SEM, KND, ENSG, USPH, QHC and BLBG: S5BIOT - AMGN, GILD, ABBV, CELG, BIIB, REGN, ALXN, VRTX. bca.uses_in_2016_06_28_003_c1 bca.uses_in_2016_06_28_003_c1