Morgan Stanley Fund: Will the Fed's rate cut heat up? Is it time for pharmaceutical stocks to "counterattack"?

According to the Smart Finance app, Morgan Stanley Fund stated in a report that based on historical data, there is a clear negative correlation between the innovation drug index and the Federal Reserve interest rate. If the Federal Reserve cuts interest rates, the preference for riskier assets will increase, and innovative drugs with higher growth potential may receive more favor from risk capital in the short to medium term, gaining some upward momentum. Apart from A-share innovative drugs, Hong Kong-listed innovative drugs are also worth paying attention to. From the perspective of market access policies, the Hong Kong Stock Exchange allows biotechnology companies that meet certain conditions but are not yet profitable to go public. Therefore, many innovative drug companies, new biopharmaceutical companies, and other biotechnology companies have completed their listings on the Hong Kong Stock Exchange, making the targets of innovative drugs in Hong Kong more diverse.

What is the overall situation of the pharmaceutical sector?

Since reaching a peak in 2021, the pharmaceutical sector has been declining for three consecutive years. The main reasons behind this include the impact of declining residents' expected income on the consumption of medical sectors, the slowdown in medical insurance income growth, policy pressures such as drug price comparisons and the implementation of DRG 2.0, as well as the uncertainty brought about by the US Congress' "Biological Safety Act".

However, from a fundamental perspective, the pharmaceutical sector has a strong essential attribute. In the process of the population aging, the long-term growth potential of the pharmaceutical industry still exists. Although there is pressure on the medical insurance income side, measures such as delaying retirement and personal account reforms will benefit the medical insurance income side, and there is still room for improvement in the long term. At the same time, the growth rate of medical insurance payment side remains above 10%, and the implementation of DRG 2.0 aims to improve the efficiency of medical insurance fund utilization without suppressing medical demand. From a valuation perspective, after more than three years of adjustment, the pharmaceutical sector's valuation is relatively prominent, with strong attractiveness.

Wang Dapeng, Director of Research and Management Department at Morgan Stanley Fund, and manager of Morgan Stanley Health Industry Hybrid and Morgan Stanley Shanghai-Hong Kong-Shenzhen Select Fund, stated in his latest semi-annual report, "Although the pharmaceutical sector has undergone many adjustments since the beginning of the year, we remain optimistic about the future of the pharmaceutical sector. Internally, the impact of anti-corruption on diagnosis and treatment continues to weaken, and it is expected that the sector will continue to recover on a month-on-month basis. In the long term, anti-corruption is expected to become normalized, which is conducive to the competitiveness improvement of high-quality leading enterprises; in terms of policies, the 2024 centralized procurement will continue to improve quality and expand coverage, gradually absorbed by the market, while policies continue to encourage innovation and local governments continue to introduce encouraging policies; externally, the gradual easing of US inflation is expected to start an interest rate cut cycle within the year, which is expected to alleviate the pressure on the growth of pharmaceuticals."

Why would a Federal Reserve interest rate cut be beneficial for innovative drugs?

The innovative drug industry is highly sensitive to interest rate changes. Based on historical data, there is a clear negative correlation between the innovation drug index and the Federal Reserve interest rate, meaning that when the Federal Reserve cuts interest rates, innovative drugs usually perform well.

Data Source: Wind, historical data is for reference only and does not represent future performance

The reason behind this is that the innovative drug sector has a long research and development cycle, high investment, and high costs, heavily relying on venture capital and external funding in the early stages. When the market raises interest rates, low-risk investment assets have a higher cost-effectiveness, and funds are less willing to take on greater risks to invest in innovative drugs and other high-research, high-growth equity assets As interest rate hikes stop or gradually decrease, market risk appetite increases, and more funds will flow back into the stock market. The financing situation for innovative pharmaceutical companies will improve, ensuring the continuous cash flow of enterprises. In other words, interest rate cuts have created a favorable environment for innovative pharmaceutical companies