Source: Zhitong Finance "Since 1950, the S&P 500 index has risen more than 10% 21 times as of the end of May. In about 90% of these cases, the S&P 500 index rose for the rest of the year. There were only two instances of declines for the rest of the year, in 1987 (-13%) and 1986 (-0.1%)." With the rebound of the stock market, the old adage "Sell in May and Go Away" seems to have been a bad advice once again. Last month, the S&P 500 index rose 4.8%, the best May performance since 2009. The NASDAQ 100 index rose nearly 6.2%, and the NASDAQ Composite Index rose 6.9%. Goldman Sachs FICC & Equities Trading Division said: "History doesn't really support this saying. Don't sell, leave the market (go on vacation), and enjoy the good times." The rising trend is still to be continued? If history is any guide, it may indicate that the rise of the stock market is not over yet. Looking ahead to the rest of 2024, Scott Rubner, Managing Director of the Goldman Sachs Global Markets Division and tactical expert, pointed out the following historical background for investors. Rubner stated that the S&P 500 index has risen 10.7% year-to-date, and since 1950, the S&P 500 index has risen more than 10% 21 times as of the end of May. In about 90% of these cases, the S&P 500 index rose for the rest of the year. There were only two instances of declines for the rest of the year, in 1987 (-13%) and 1986 (-0.1%). "Since 1950, the median return of the last 7 months of each year (June 1 to December 31) is 5.4%. In the aforementioned 21 cases, the average performance of the last 7 months increased to 8.1%." Rubner added. Rubner also pointed out that the NASDAQ index has risen for 16 consecutive Julys, with an average return of about 4.64%.

Morgan Stanley Fund article mentioned that based on historical data, the innovative drug index has a clear negative correlation with the Fed rate. If the Fed rate cut lands, the preference for risk increases, and innovative drugs with higher growth potential may receive more favor from risk capital in the medium term, thereby gaining certain upward momentum. Apart from A-share innovative drugs, Hong Kong-listed innovative drugs are also worth attention. From the perspective of market access policies, the Hong Kong Stock Exchange allows bio-tech companies that meet the conditions but have not yet been profitable to list, so many innovative drug enterprises, new biopharmaceutical companies, and other biotech firms are listed in Hong Kong, enriching the list of innovative drug targets in Hong Kong.

What is the overall situation of the pharmaceutical sector?

Since the peak in 2021, the pharmaceutical sector has been declining for three consecutive years. The main reasons behind this include the impact of declining household income expectations on consumer medical sectors, the slowdown in medical insurance revenue growth, policy pressures such as drug price comparisons and the implementation of DRG 2.0, as well as uncertainties brought by the US Congress's Biosecurity Act.

However, from a fundamental perspective, the pharmaceutical sector has a strong essential attribute. As the population continues to age, the long-term growth potential of the medical industry still exists. Despite pressure on the medical insurance revenue side, measures such as delayed retirement policies and individual account reforms will benefit the medical insurance revenue side. In the long run, there is still room for improvement in medical insurance revenue side. At the same time, the growth rate of medical insurance payments remains above 10%, and the implementation of DRG 2.0 aims to improve the efficiency of medical insurance fund utilization, not suppress medical demand. On the other hand, from a valuation perspective, after more than three years of adjustment, the pharmaceutical sector's valuation cost-effectiveness is prominent and attractive.

Wang Dapeng, Director of Research Management Department of Morgan Stanley Fund and Manager of JPM Health Industry Mixed Fund and JPM Hushen Excellent Fund, expressed in his latest semi-annual report, 'Although there have been many adjustments in the pharmaceutical sector 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 show a continuous recovery trend on a month-on-month basis. In the long term, anti-corruption is expected to become normalized, which will help improve the competitiveness of high-quality leading enterprises; in terms of policies, the 2024 centralized procurement will continue to improve quality and expand coverage, and is expected to be gradually absorbed by the market, while policies will continue to encourage innovation with a consistent tone, 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, helping to alleviate the suppression on the growth of pharmaceuticals.'

Why would a Fed rate cut be beneficial for innovative drugs?

The innovative drug industry is highly sensitive to changes in interest rates. From historical data, the innovative drug index is negatively correlated with the Federal Reserve interest rate, which means that when the Federal Reserve cuts interest rates, innovative drugs usually perform well.

The reason behind this is that the innovative drug sector has a long research and development cycle, high investment, and high costs. It heavily relies on venture capital and external funding in the early stages. When the market raises interest rates, low-risk investments have higher cost-effectiveness and funds are unwilling to take on greater risks in investing in innovative drugs and other equity assets with heavy research and development and high growth. As interest rates stop rising or gradually decline, market risk appetite increases and more funds will flow back into the stock market. The financing situation of innovative drug companies will improve, and the continuous cash flow of enterprises will be guaranteed. In other words, interest rate cuts create a favorable environment for innovative drug companies.

Editor/rice