Drugmaker shares have rebounded to record highs after the plunge in Japanese stocks early this month, in a sign that investors favor defensive shares amid concern that global economic growth will slow.
The Topix pharmaceutical index became on Aug 22 the first and so far only sector to climb to a new peak, after a rout that saw Japan’s stock market enter a bear market, according to Bloomberg-compiled data going back to 1983.
Drugmakers have gained 10% since the start of July through last week, leading advances among 33 sectors in Topix index. In the first half of the year it was No. 18 in performance, the data show.
Pharmaceuticals are usually considered defensive stocks that are less vulnerable to economic slumps, and drugmakers outside of Japan have also done well as investors become risk averse. In the US, healthcare shares are the third best performers in August from 6th place in July among the S&P 500’s 11 industry-specific indexes. In the Stoxx Europe 600 Index, healthcare also ranked seventh out of 20 industries in August.
The full rebound in Japanese pharmaceutical stocks represents “the flip-side of fears of a global economic slowdown, which triggered the overall market correction”, said Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Asset Management.
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Japanese pharmaceutical firms also have scope to expand overseas, unlike many companies that are domestically oriented. That makes drug makers growth shares, with their valuations and return on equity also high, said Yasuhiko Hirakawa at Rakuten Investment Management. With semiconductor-related stocks already expensive, drug companies are becoming the targets of buying because their shares have lagged other growth shares and their earnings have been strong.
The top-performing pharmaceutical stocks since July have been firms with relatively high market capitalisation, led by Sumitomo Pharma Co., which has surged 67% through las week. Otsuka Holdings Co. and Chugai Pharmaceutical Co., both rallied at least 25%. The broad Topix index has dropped 4.5% during the period, and is still down more than 8% from its July high.
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If investor concerns about Japan’s share market and the economy’s outlook ease, pharmaceutical stocks may come under selling pressure as a reaction to the rally so far. While Ishigane at Mitsubishi UFJ Asset Management doesn’t see a US recession as his main scenario, he still expects the popularity of pharmaceutical stocks to continue for at least the next half year or so.
Charts: Bloomberg
