Bank of America expects European stocks broadly to rise this year, but its key underweight call is the pharmaceutical sector, and the recommendation has nothing to do with talk of reining in U.S. drug prices.
Bank of America’s call on European pharmaceuticals — whose members including AstraZeneca AZN, +0.38% AZN, -0.60% , GlaxoSmithKline GSK, -0.62% GSK, -0.43% , Novartis NVS, -1.00% NOVN, -0.90% , Roche ROG, -0.25% and Sanofi SAN, -0.11% SNY, -1.00% — is based on how closely they historically track U.S. bond yields TMUBMUSD10Y, -1.10% and the U.S. dollar DXY, +0.00% .
The Stoxx Europe pharmaceutical and biotech index 156762, +0.27% has gained nearly 30% over the last 52 weeks, compared to a 22% gain for the Stoxx Europe 600 SXXP, -0.40% .
Sebastian Raedler, head of European equity strategy at Bank of America, pointed out that pharma stocks, relative to the broad market, typically move in the opposite direction to U.S. bond yields. So if yields rise from here — and the Bank of America team led by Raedler expects it will on expectations for a modest improvement in global purchasing managers indexes — then the sector should be hurt.
Another issue for the pharma sector is the sensitivity to the dollar, which is logical given that 40% of the sector’s sales come from the U.S.
The Bank of America team expects the dollar to weaken on expectations a reduction in trade tensions will reduce global macro uncertainty.
Taken together, the bank expects the European drug sector to underperform the broader index by 13% over six months.
What isn’t a factor is the political discussion, particularly from U.S. presidential candidates including Sen. Bernie Sanders and Elizabeth Warren, of trying to reduce drug prices.
“I feel drug prices are typically used to retrofit a move in the sector that’s already happened,” said Raedler, who joined Bank of America from Deutsche Bank in July. “People tend to focus on it to explain underperformance that is typically driven by bonds and the dollar and they tend to ignore it when the sector rips, as it has done,” he said.
“If I can explain so much of the movement in the sector as just two macro drivers, that leaves me very little space for political discourses about drug prices to have made at any mark of the last 20 years,” he said.
Conversely, Bank of America is overweight two other defensive sectors, food and beverage 175876, -0.46% as well as personal and household goods SXQP, -0.44% .
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