NEW YORK • After a four-year love affair with healthcare shares, investors are moving on.
Investors have been dumping shares of everything from hospitals to traditional pharmaceutical companies and insurers in recent weeks.
Since peaking in July, the Nasdaq Biotech Index has fallen 23 per cent, the broad S&P Health Care Index has lost 12 per cent and the S&P 500 Health Care Facilities index is down 31 per cent.
Fund managers now say they expect myriad pressures weighing on the sector for the rest of the year and possibly into next year. They include regulatory threats on drug prices, disappointing earnings, higher interest rates that could hurt heavily indebted hospitals, and the loss of the initial Obamacare bump in business.
Profit warnings from HCA Holdings and Community Health Systems since last week have pummelled shares of hospital operators. The health facilities index is down 13 per cent since its Oct 14 close.
"The best case through the end of the year is range-bound for healthcare, maybe biased downward slightly," said healthcare portfolio manager at New York's E Squared Asset Management Les Funtleyder. The cautious attitude of investors is new for the S&P 500 healthcare sector, which has provided double-digit returns every year since 2011.
That run-up, as well as expectations of financially rewarding mergers, may have left the sector priced for only the best of news.
The broad healthcare index selling at a forward price-to-earnings ratio of 18.7 in July is down to about 16, in line with the broader market.
Third-quarter results could give investors further reason to be cautious. Only half of the healthcare companies that have reported their earnings thus far have beaten analysts' estimates on revenues.
To be sure, the health sector is still profitable, with third-quarter earnings projected to be up 4.5 per cent from the same quarter a year ago.
But the move out of the sector has been rapid. The iShares US Pharmaceuticals exchange traded fund posted US$77.8 million (S$108.8 million) in outflows in the third quarter, its largest quarterly outflow since it started in 2006, and it has already lost US$75 million in the first 22 days of the current quarter.
The iShares US Health Care Providers ETF, which includes insurers and hospital operators, recorded its first withdrawals this year in that quarter, and investors are continuing to pull money out this quarter.