In these last weeks leading to the US presidential election the actuality is dominated by the highly acrimonious and not unentertaining diatribes between the candidates. According to the polls a Clinton victory seems much likelier than a Trump win. However, as was recently shown by the Brexit vote, elections can always reserve surprises particularly considering that the current election is in many ways atypical.
A Clinton win would be well-received by the markets as it would be seen as a continuity of current policies which have served markets well for the last few years. A Trump win would likely lead to a market correction, initially at least, as it would be perceived as a break with the status-quo.
While there are major differences between the candidates the significance of presidential elections tends to be overrated. The powerful albeit not so well-understood business cycles underlying our economies are more critical. Cycles have been present as long as civilization and the first example might be the interpretation by Joseph of Pharaoh’s dreams in the Bible. Joseph foresaw seven years of plenty to be followed by seven years of famine and advised Egypt’s Pharaoh to set-aside grain in the good years as a reserve for the bad years.
Often, a president lucky enough to preside over an upturn in the business cycle will be perceived as a “good president” while a less lucky one presiding over a business downturn will be perceived negatively as happened to George H.W. Bush. As the 1992 recession developed his approval rating of over 80% following the first Gulf War collapsed within a few months to see him lose re-election to then newcomer Bill Clinton.
The analysis of the S&P 500 results over seven decades between 1945 and 2015 shows that the market performance both in an election year and in the first year of a new presidency are in line with the 9% average yearly performance over the long term1. Interestingly the only year of the presidential cycle which stands out is the third one – its impressive 16% average return is almost the double of the average year and it was positive in 88% of the years while in average the S&P 500 has been positive in 71% of the years.
Healthcare, biotech stocks in particular, is the sector that has been most impacted by the current campaign and it has markedly underperformed the S&P 500 year-to-date. The market concern here is price control as Clinton in particular has been very vocal about criticizing the pharma industry. Nevertheless, we continue to consider the healthcare sector as one of the most attractive ones for many years to come.
In the short term we expect healthcare stocks to rally following the elections as it will appear that the fears are overdone. Looking back at history this is what happened in the past in similar circumstances. Over the last few decades the sector has faced many challenges including Obamacare but it has continued to thrive. The ability of any politician to force major price control measures is limited. Healthcare is one of the most powerful interest groups and has been extremely successful at preserving its interests. This is not to deny that some companies which have been clearly abusive will continue to face major pressure. However much of the pricing power and profits of biotech drugs has come from some revolutionary often life-saving drugs. This includes the increasingly successful cancer immunotherapy drugs and Gilead’s drugs to treat hepatitis C. The importance of allowing solid profit margins to maintain the investments in R&D across the pharma industry is clear and the companies able to develop truly added-value drugs will continue to be highly profitable.
Over more than two decades the healthcare indices have outperformed general market indices very significantly, in the order of 300-400bps. In addition, while providing a higher return they have also proven much more resilient to financial crises and experienced much lower drawdowns. Considering the aging of the population globally, the increasing demand for healthcare from emerging markets and the renewed industry innovation the fundamentals are in place for continued success. With a long-term view we therefore continue to recommend a sizeable exposure to healthcare. This exposure is in our view best achieved through high quality investment funds with top-notch investment managers who are able to identify the best opportunities thereby adding further alpha to the sector’s considerable upside.