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Health care stocks are solid, but some remain a big gamble

Money

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(CNN) — Investors can thank health care stocks for a chunk of the stock market’s rally.

The S&P 500 healthcare sector has risen 33.5% since March 23, when the S&P 500 hit its recent low. That beats the broader index’s 32% gain in the same period.

Both small and large companies have benefited from investor hopes that a Covid-19 vaccine or treatment is on the way.

See here: Shares of Moderna, which last week touted positive early results for its coronavirus vaccine, have spiked 253% year-to-date, even though the company doesn’t sell any products yet. It’s now valued at more than $26 billion.

Meanwhile, stock in AstraZeneca has jumped more than 18%. The British drug company is working with Oxford University on a vaccine, with deliveries potentially starting in September. It was announced last week that the US government has pledged up to $1.2 billion to accelerate development and secure 300 million doses.

But these products are a gamble for both investors and the companies testing them, with stocks remaining vulnerable to any news out of clinical trials.

Optimism over coronavirus drugs isn’t the only factor driving health care stocks higher, Wells Fargo equity analyst Christopher Harvey says. They’ve also benefited from investors looking to make more defensive plays during a recession.

“What we’ve seen during the selloff is health care has provided some really good downside protection,” Harvey said. He also noted that health care stocks now make up a much larger proportion of low-volatility exchange-traded funds, which helps drive money toward the sector.

Nick Raich, CEO of The Earnings Scout, said health care stocks are actually cheap compared to the rest of the market. The health care sector is trading at nearly 16 times projected earnings over the next 12 months, while the S&P 500 is trading at more than 20 times projected earnings — in part because health care earnings have held up better than most.

“This is a trend that should persist in the post-[Covid] world and as hospitals open back up for full business,” Raich said.

Harvey also noted that political headwinds the industry has faced in the past — namely criticism over high drug prices — have dissipated as drugmakers step up to provide essential services during a health crisis.

Although health care stocks, on the whole, have remained solid picks through the pandemic, some individual names remain tricky bets. Medical device makers may struggle if people need to keep postponing elective surgeries. And the biotech sector is notoriously up and down.

“It’s hard to know if drugs are going to work — and even if they do work, it’s hard to know how that’s going to project to the market,” Raymond James analyst Steven Seedhouse says.

Businesses fear for the future of Hong Kong

Hong Kong’s status as Asia’s premier financial hub survived months of political unrest last year. But news that China is planning to further erode the city’s autonomy has once again called into question its future as an East-West conduit for global business, CNN Business colleague Jill Disis reports.

China announced Thursday that it plans to introduce a law in Hong Kong that is expected to ban sedition, secession and subversion against Beijing. It will also enable Chinese national security agencies to operate in the city.

Market response: The reaction was swift and fearful. Hong Kong’s benchmark Hang Seng plummeted more than 5% on Friday, its worst one-day drop since July 2015.

Beijng’s move was stunning because it implies much greater intervention in the city, which has largely been allowed to manage its own affairs since the former British colony became a semi-autonomous region of China more than 20 years ago.

“Hong Kong today stands as a model of free trade, strong governance, free flow of information and efficiency,” Robert Grieves, chairman of the American Chamber of Commerce in Hong Kong, said in a statement. “No one wins if the foundation for Hong Kong’s role as a prime international business and financial center is eroded.”

Companies and investors are concerned that the action could escalate tensions between the United States and China at a precarious moment. Washington and Beijing have been trading blame over handling of the coronavirus pandemic, and US lawmakers passed legislation last year in support of Hong Kong’s pro-democracy protesters.

The US law linked Hong Kong’s special trading status with the United States to an annual review of its freedoms.

Know this stat: More than 1,300 US companies operate in the city, analysts at Citi told clients Friday, adding that the threat of revoking Hong Kong’s special status with the United States “could weigh on business confidence.”

The-CNN-Wire
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