Obamacare Is Not Dead. But What Is the Impact for the Equity Markets?

In the end President Trump did not succeed in repealing the health care measures — the Affordable Care Act, known as “Obamacare” — put in place by his predecessor. On 24 March, Congress voted against the health care act put forward by Paul Ryan, Speaker of the US House of Representatives. Within the same party, the Republicans did not manage to reach a compromise, torn between the moderates on the one hand, and the Freedom Caucus conservatives on the other. A huge disappointment for Donald Trump. The impact goes beyond the health care sector because this failure highlights the division among the Republicans and the absence of a clear majority. It is particularly worrying as it could challenge the agenda of other reforms announced by the new president.
 

What conclusions can be drawn for the health care sector? Will it remain solid on several counts?

1. The White House has abandoned the health insurance bill for the moment and should focus on other aspects of its programme. This status quo situation reduces the political risks in the health care sector. Stocks which had suffered from the prospect of some 15 million Americans losing insurance coverage (pharmacy benefit managers and hospitals) could benefit in the short term. Note that the performance of pharmaceutical groups was very robust during the debate of Ryan’s bill. The reform’s impact on their revenues is expected to be small, suggesting that any recovery in pharma stocks will probably not be spectacular.

2. The industry might benefit from future fiscal reforms (as long as they are passed). Tax cuts and the repatriation of cash from abroad—another of Donald Trump’s major projects—could benefit the sector. Industry players could use the available cash for bolt-on mergers and acquisitions.

3. The good visibility of long-term prospects in the sector (innovations, ageing population) is an advantage in this uncertain environment. Based on analyst consensus, earnings growth in the US for the next 12 months is 8%.

4. Against a backdrop of doubts about the ongoing reflation trade, investors might temporarily snub pro-cyclical sectors in favour of more defensive sectors.

5. Sector valuations are not particularly high: 14.3x earnings in the US, i.e. below its 2-year average.

However, although political risks are lower today, they have not completely disappeared. Furthermore, President Trump has mentioned his intention to step up the control of drug prices that he considers too high. Although the fall in prices and squeezed profit margins are regular concerns in the industry, investors may become concerned about what Trump will announce in connection to this plan. For example, he might give details of his direct negotiation plan as part of the Medicaid (Part D), but once again the risk is that he will not find backing from the Republican majority. More flexible regulations, sought by Donald Trump (with a simplified approval process from the Food and Drugs Administration or FDA) would also imply greater competition in the industry (particularly for generic drugs).

In conclusion, the health care sector should benefit from President Trump’s political difficulties in the short term and it should outperform in a context of heightened risk aversion.

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