(Bloomberg) — A shift toward defense stocks and supportive government policies are making struggling Chinese health-care shares more attractive.
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The MSCI China Healthcare Index is showing signs of improving after a 23% drop this year. New measures by the Chinese government to boost the industry and hopes of an interest rate cut from the U.S. Federal Reserve are creating room for a recovery, according to data compiled by Bloomberg. The index remains at its lowest level on record compared with its global peers.
“We remain positive on the outlook for blue-chip companies in certain subsectors of China’s healthcare sector, such as medical device and pharmaceutical innovation,” said Jim Zhang, Asia equity investment manager at abrdn.
China healthcare stocks began recovering in July, with MSCI’s China healthcare subindex outperforming the broader benchmark as investors sought cheaper corners of the stock index. The recovery came after concerns over the U.S. BioSecure law and Beijing’s broader anti-corruption crackdown caused months of slumping for the sector’s shares.
“We are becoming optimistic on the pharmaceutical sector,” Morgan Stanley analysts led by Shawn Wu wrote in a note. Among medical technology stocks, the firm likes Shanghai United Imaging Healthcare Co. and Shenzhen Minglei Biomedical Electronics Co., which have a high percentage of sales from device replacement. It also likes Alibaba Health Information Technology Co. in the internet medical space.
The poliovirus outbreak adds a new dimension to investor calculations about which industry companies will respond quickly to expected demand. The World Health Organization has declared the outbreak in Africa a global health emergency, sending shares of Chinese virus-detection kit makers, including Daan Gene Co, higher on Thursday.
Policy Support
China has rolled out policies to help cash-strapped medical companies, including a pilot program to optimize the clinical trial process for some drugs. The central government last month also approved measures aimed at stimulating domestic biotech innovation, though details have not yet been made public.
These developments bode well for a market that was once dominated by imports of innovative medicines.
These will “reinvigorate some of the previous drug development activity and investment,” said Jamie Maarten, an analyst at Bloomberg Intelligence.
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Domestic medical companies also continue to sign licensing agreements with global pharmaceutical giants: Merck recently agreed to purchase a bispecific antibody from Curon Biopharmaceuticals, while Takeda Pharmaceutical in June signed an option agreement with Ascentage Pharma Group International to develop a blood cancer drug.
Additionally, according to Deutsche Bank, the performance of biotech and healthcare stocks is typically inversely correlated with U.S. interest rates, so the Fed’s easing of policy should support the sector.
“We expect a more aggressive Fed rate cutting roadmap for the remainder of 2024, leading to improved sentiment in the healthcare sector in the second half of the year,” analyst Cyrus Ng wrote in a note this week.
Still, Chinese health stocks face some challenges. The Biosecure Act, which could ban Chinese biotech companies from signing contracts with the U.S., “creates a lot of uncertainty beyond this year,” Maarten said.
A lack of exposure to big-name weight-loss drug makers also suggests Chinese health stocks could lag behind their overseas peers.Eli Lilly & Co., which sells obesity drug Zepbound, is the largest weighting in MSCI’s global health subindex, while Novo Nordisk, maker of hit obesity drug Wegovy, is third.
Still, “China is increasingly investing in innovative pharmaceuticals, so it’s not impossible that Chinese companies could one day produce something similar,” said Nicholas Chui, emerging markets equity portfolio manager at Franklin Templeton.
(The sixth paragraph describes the evolution of the MPOX epidemic.)
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