Weekly Reports | Sep 18 2020
Weekly Broker Wrap: health care & the US election; contractors; financials; and accounting software
-Heightened focus on pharmaceutical, biotech as US election gets underway
-Oz contractor sector underperforms during the pandemic
-Variable outlook for diversified financials, negatives largely factored into banks
-Xero challenging Sage in the UK, most recommended in Oz
By Eva Brocklehurst
Health & US Election
Janus Henderson asserts the coronavirus pandemic has cast a more positive light over the US healthcare sector. The urgent need to define treatments has helped focus attention on innovation in the pharmaceutical and biotech industries.
Based on early data, a vaccine is expected to be approved by early 2021. While healthcare remains a key campaign issue in the upcoming US federal election, sentiment has improved and stocks in the sector have benefited as a result.
Janus Henderson notes the NASDAQ biotechnology index has gained 11%, nearly double the return of the S&P 500. In comparison, during the 2016 presidential election, biotechnology declined -12.5% while the S&P 500 gained 8.6%.
While the Trump administration has joined a case brought to invalidate the Affordable Care Act, the analysts note this appears to have been political theatre rather than a real policy initiative. Furthermore, Republicans have not crafted alternative legislation.
In terms of what would happen if the Democrat Joe Biden was swept to power, his plan to roll out a public health option could still face an uphill battle. The ability to push reimbursement rates significantly lower could be limited by the poor financial state of many not-for-profit hospitals.
While volatility in healthcare stocks is likely, and the market typically trades on fear of healthcare reform long before any concrete details, Janus Henderson believes neither side wishes to undermine pharmaceutical innovation. Ultimately a solution to limit out-of-pocket costs and improve access to medicine should occur, benefiting the industry in the long run.
Macquarie observes the contractor sector has underperformed the ASX200 since the start of the pandemic, noting that Downer EDI ((DOW)) and Worley ((WOR)) actually outperformed as SARS was encountered and contained back in 2003.
The broker considers Downer EDI cheap, with exposure to a recovery post the pandemic and a solid customer base. Moreover, the company's move to a services business is working, with a lot more alliance-based contracts that reduce the risk profile.
Worley has equally good leverage to a medium-term recovery, and Macquarie notes the worst of capital expenditure reductions is being encountered in 2020. The main catalyst will be a stabilisation in the workforce and new contracts, particularly renewables.
Meanwhile for Monadelphous ((MND)), iron ore is now 32% of revenue and there is a healthy pipeline of work. The company also envisages margins can return to pre-pandemic levels of 6.9% although Macquarie is slightly less upbeat.