Health stocks seen as hedge to trade war

Equity investors are flocking to health care in the wake of escalating geopolitical tensions and a waning appetite for technology stocks.

The Standard & Poor’s 500 Health Care Index is the best-performing sector so far this quarter, with a 7.8 percent gain, outperforming a 4.5 percent rise in the broader S&P index.

Pharmaceutical and biotech stocks are among the biggest outperformers as they rebound from earlier concerns about failed clinical trials and scrutiny on drug pricing in Washington. The momentum has accelerated as investors seek havens from a potential trade war.

“It was time for the group to catch up a little,” Andrew Hilgenbrink, who helps manage more than $1 billion in health care assets at Highland Capital Management, said in a telephone interview. “Tariffs are kind of a nonevent for the health care space. Furthermore, valuations have become very attractive in large-cap pharma and biotech.”

Because health care stocks continue to trade at a discount to the overall market, Hilgenbrink said, “there’s still additional room to go” in the recent rally. HCA Healthcare, Iqvia Holdings, Eli Lilly & Co. and San Francisco’s Nektar Therapeutics, are the sector’s best performers in the third quarter.

Drugmakers including Johnson & Johnson say that U.S. tariffs on Chinese imports haven’t hurt their results yet, beyond the effect of a stronger dollar. That concurs with an analysis from Evercore ISI that U.S. medicines won’t see much impact from tariffs, because raw bulk materials imported from China are mainly antibiotics.

The three largest exchange-traded funds tracking health care took in more than $1 billion in July. The $8 billion Vanguard Health Care ETF, known by its ticker VHT, added $47 million last week, its highest weekly inflows in more than a year.

Bill Smead, who oversees about $2.2 billion at Smead Capital Management, said in a phone interview that this is “the beginning of reallocation of assets from the most popular sectors,” including tech.

Despite a rocky July, tech is still the bestperforming sector this year, as it was in 2017. And health care investors have reason to remain cautious about the recent gains. The next test for the sector is expected to come with the midterm elections, which are less than three months away. President Trump will need the new Congress’ backing to advance his plans to lower medical costs.

The threat to control drug prices “is not going away,” Ying Huang, a biotech analyst with Bank of America Merrill Lynch, said in a telephone interview. With more clarity in Washington, he said, “We might see generalists coming back to the sector.”