The healthcare sector was a laggard last year, but the iShares Nasdaq Biotechnology ETF (NasdaqGM: IBB), SPDR S&P Biotech ETF (NYSEArca: XBI) and other biotechnology exchange traded funds are shaking out of that slumber with some solid gains in 2017’s early stages.
Healthcare stocks and ETFs rallied immediately following Republican Donald Trump’s surprising November victory. The impact of a Trump presidency on healthcare stocks remains to be seen. Candidate Trump rebuked Obamacare and if successful in that effort, there would likely be some effect on diversified healthcare ETFs due to their exposure to health insurance providers.
While Trump was seen as the preferred candidate for the healthcare sector, the newly inaugurated president has not been shy about unleashing rhetoric aimed at high pharmaceuticals prices. Additionally, some industry observers believe healthcare stocks could face more politically-induced headwinds as the Republican-controlled Congress looks to unwind the Affordable Care Act, also known as Obamacare.
“Over the past decade many drug companies racked up EPS growth through regular and significant price increases. Political pressure to restrain these price hikes, or even roll them back, has resulted in lower than projected earnings, lower estimates for growth, and P/E compression from historical levels,” according to a Seeking Alpha analysis of pharmaceuticals trends.
Among the most vulnerable to a shake up in the status quo, the hospital industry could be among the worst hit from the proposed changes, which could cause millions to lose health coverage. Looking at ETF options, the iShares U.S. Healthcare Providers ETF (NYSEArca: IHF) would be among the worst off in case of a sell off in the health industry.
“Pharma stocks are unlikely to repeat the record of the dot.com era where stocks shed huge amounts over multi-year periods, sometimes on the road to bankruptcy. For the most part, we are not worried about that. However, we expect the stock prices of drug companies to settle in new, lower trading ranges,” notes Seeking Alpha.
The impact of a Trump presidency on healthcare stocks remains to be seen. Candidate Trump rebuked Obamacare and if successful in that effort, there would likely be some effect on diversified healthcare ETFs due to their exposure to health insurance providers.
There are other catalysts to consider, including that the U.S. economy moving into the late-cycle phase, overall growth may slow and signs of an economic slowdown could pop up. Consequently, investors may also turn to defensive sectors that are less economically sensitive, such as health care. Still, political risk looms.
For more information on the biotech sector, visit our biotechnology category.