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Murdo MacLean, client investment manager, Walter Scott.
The United States stock market has been one of the strongest equity markets over the last sort of decade really. That is fundamentally driven by the sheer number of quality businesses, obviously that reside in the U.S. It’s not the only country that has excellent businesses, but clearly the number of excellent businesses is significant there.
2019 was a stellar year, even by the very high standards of the U.S. stock market, rising just over 30% for MSCI U.S., and the S&P 500 is having its best year since 2013. So, this capped off a remarkably strong decade of returns for U.S. stocks. Which is remarkable considering the fact that trade tensions persisted for much of 2019. Even as we entered at this stage last year, there were plenty things to be concerned about, particularly reflecting that trade dispute. So, in spite of that, the returns of the market delivered were really quite remarkable. I think that that reflects an equity market backdrop that appears confident of a resolution between the U.S. and China.
Now we saw, towards the end of last year, that some progress was being made and there was a bit of a de-escalation in terms of the size of these tariffs, which is encouraging. Now when you look at the fact that this is an election year as well, it is the case that historically pharmaceutical stocks have suffered during those election years. Now that may well be the case again. It’s typical that politicians tend to see those companies, which are highly profitable typically, that price their drugs quite at expensive levels. Those are usually good targets for politicians when it comes to sort of looking to appeal to voters on an emotional basis. Hence why typically … And the threat of I guess regulatory change, or pricing change often does lead to an under performance for a period for pharmaceutical stocks.
Possible offsetting factors this year may include the fact that as a sector itself, they have actually underperformed other sectors for quite some time. So heading into 2020, the prevailing valuation environment for pharmaceutical stocks is perhaps a good bit more attractive than it has been in previous years. That is no guarantee that they will perform better, but it is something that I think we should bear in mind. In 2019, it is indeed a case in point where overall healthcare stocks returned around 14% in U.S. dollar terms, it was only the 10th best performing sector over the year for the market.
We look at businesses, but we don’t look at sectors we construct. We will not buy any pharmaceutical businesses, or healthcare companies, if they don’t meet our internal investment criteria. The fact is that quite a number of them do and historically that has been the case. It’s a sector that we’ve long felt was attractive, and therefore when you look at how our healthcare stocks performed last year, in fact over the course of 2019, they were actually the biggest relative contributors to our performance in 2019. So whilst it was only the 10th best sector for the market, for us — for the portfolio itself, for the fund itself — it was a very strong contributor. Indeed the largest contributor to returns. Maybe it’s more interesting to consider why that might be the case, and I think when we look at healthcare, our focus specifically is on companies that are highly innovative, and they have the return structure that allow them to continually invest for the future. The exposure that we have in the fund is nicely diversified, across not just pharmaceutical, but also medical devices, and healthcare information technology sectors. This is a very diverse list of businesses all under the pharmaceutical … Sorry, should I say, under the healthcare banner. This diversification is crucial and it should enable the portfolio to both benefit from growth and earnings, but also offer a degree of insulation should market see a pickup in volatility.