The worst may be past for managed-care stocks

Investors are growing fed up with the political rhetoric in Washington
Chief Investment Office16 Oct 2019
Photo credit: AFP Photo


The worst may be past for managed-care stocks this year, barring any major surprises, as investors are growing fed up with the political rhetoric in Washington, according to Wall Street analysts.

UnitedHealth Group Inc’s solid third-quarter earnings on Tuesday (15 October) sparked the sector’s biggest rally in a decade as it helped ease concerns about rising medical costs. While expectations were low heading into the report, the magnitude of the move illustrates just how negative sentiment has gotten. Also roiled by fears of a single-payer system, health insurers appear to have found their footing as investors turned more optimistic about the industry’s business outlook, according to an analyst.

The S&P 500 Managed Care Index, which has plunged into two corrections this year, has rebounded to its highest level since August. The gauge jumped as much as 7.5% on Tuesday, the most since November 2009. It is still trading down 4.7% for the year.

Tuesday’s Democratic presidential primary debate will serve as a key test for investors’ renewed optimism. Observers are looking to see whether Senator Elizabeth Warren, who polls show is tied for the lead with former Vice President Joe Biden, will elaborate on her plans for health care. She supports “Medicare-for-All” and has blasted insurers in previous debates, but has remained notably vague on the specifics.

US stocks touched four-week highs, led by health care and financial shares, as earnings season began in earnest. The Nasdaq Composite Index jumped 1.24% to 8,148.71, while the S&P 500 topped 3,000 on an intraday basis for the first time in three weeks. The benchmark pared gains to finish 1.00% higher at 2,995.68. The Dow Jones Industrial Average added 0.89% to 27,024.80. Treasury yields rose amid the risk-on backdrop. – Bloomberg News.



Never mind the dwindling no-deal odds and the almost desperate political optimism of recent days: For investors who remember the vortex that sucked in markets from Tokyo to Toronto three years ago, a hard Brexit remains a tail risk which is simply too big to ignore.

The hope is still that Britain can strike a divorce agreement with the European Union (EU) which preserves trade ties and averts the kind of global market crash that accompanied the 2016 UK referendum. But the political dramas since then underscore the uphill battle facing negotiators, especially given UK Prime Minister Boris Johnson’s precarious hold on power.

Among the low probability but high impact risks cited by investment banks and investors: Europe tipped into recession, a Scandinavian currency selloff, and a rout of Emerging Markets (EM).

After the two sides agreed on Friday (11 October) to begin a more detailed phase of talks, betting odds of a no-deal scenario playing out at all this year dropped below 15%.

Yet Brexit has already been spurring a quiet kind of global contagion. Real-money foreign investors keep snubbing European stocks thanks in part to political risk in the region, including dramas emanating from the UK.

If Britain does crash out, the first-order effect would be on the pound. The chairman of a French bank described a hard Brexit as a “systemic event” with the potential to push the global economy into recession.

Should a European downturn take hold, it would threaten to wake up credit premiums which have long been depressed by monetary stimulus. That would echo the 2016 breakout, when spreads of euro-denominated company bonds tracked sterling peers higher. Knock-on effects would likely be seen in the markets for hard-to-trade private debt and alternative assets, and funds that have gorged on such investments could be stuck with holdings they cannot shift.

And the shock waves would spread further afield. Investors putting a premium on safety would likely penalise EM equities most vulnerable to a global slowdown, according to an asset manager. – Bloomberg News.

The Stoxx Europe 600 Index finished 1.11% higher at 394.02 on Tuesday.



Japan took the unusual step of issuing a statement to deny its policy was in any way influenced by modern monetary theory (MMT) on a day when senior government officials hinted that extra public spending could be in the works.

“As a government, we don’t implement policy based on the idea that Japan is a successful case of MMT because its inflation and interest rates are not rising despite massive debt,” the statement says. “We are working to restore fiscal health,” it added.

The statement was issued in response to a lawmaker’s written request to clarify the government’s views on the theory.

Earlier in the day, Japan Prime Minister Shinzo Abe indicated he was ready to put together an extra budget to address economic damage caused by the typhoon Hagibis over the weekend. Abe was already expected to compile an extra budget to reduce the economic impact of a sales tax increase that is expected to cause the economy to shrink in the last three months of this year.

Some economists say the size of an extra stimulus package could be as large as JPY5t (USD46b) given the damage caused by the natural disaster to buildings, roads, and bridges. That scale of spending would likely require the issuing of new bonds, some of them added. – Bloomberg News.

The benchmark Nikkei 225 Index rose 1.64% to 22,572.41 in early-Wednesday (16 October) trading, extending the previous session’s 1.87% climb to 22,207.21.

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