Whilst there are few direct implications for UK pharmaceuticals and healthcare companies of the UK leaving the European Union, there are some indirect benefits that have triggered sector outperformance in the past week relative to the broader UK market, and even to other defensive sectors which have outperformed, like consumer staples.
Can this continue? Although recent outperformance has taken relative valuations of pharmaceuticals modestly above their long-term averages, they are still materially below peak levels seen in prior periods of market weakness. Additionally, the sector’s defensive characteristics and its status as a beneficiary of dollar strength should allow it to continue to perform well.
Here are our four reasons why: the large UK pharmaceutical/healthcare companies are global businesses and the US is by far their biggest market yet they have disproportionately large UK cost bases. As a result of a weak sterling against the US dollar, the market is anticipating that the sector is cheaper than it looks on consensus forecasts on a relative, i.e. P/E, basis.
A second factor is the attractive dividend yield of the larger companies in the pharmaceuticals/healthcare sector, which looks even better as yields on UK government bonds (gilts) have gone down post the BREXIT vote.
Thirdly, this yield looks particularly appealing given it is sustainable in the event of any UK economic slowdown post the vote, such is the sustainable nature of the sector’s earnings, i.e. the defensive nature of pharma holds more appeal in a less certain world for UK investors.
Finally, the UK pharmaceuticals/healthcare sector’s valuation looks attractive relative to other defensive sectors in the FTSE All share Index such as consumer staples, trading at a low teens discount on a forward P/E basis yet with a similar dividend yield.
In short, the attraction of the characteristics of the UK pharmaceuticals/healthcare sector, particularly the high yielding bigger companies in the space, has increased in what is a less certain UK economic outlook post the vote in favour of the UK leaving the EU.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.