Transcript:

Hello, I’m Bryce Anderson, Senior Portfolio Manager at Morningstar Investment Management. Welcome to the Market Minute, our weekly take on what’s happening in markets and importantly, what’s happening our portfolios.

Trade policy continues to dominate the headlines and following from last week, there have been more agreements ahead of the August 1 deadline. Europe and South Korea followed Japan’s lead last week, announcing an agreement with the US on a 15% tariff for both, along with some details about buying US energy products. The impact on various sectors is mixed given existing tariffs in place, and the market reaction to the news has been pretty muted so far.

In related news out of the US, the Federal Reserve has kept rates on hold as expected but adopting a wait-and-see approach to see how the tariffs flow through the economy before taking action. Domestically, inflation continues to moderate with data out on Wednesday. Australian government yields fell in response and expectations of rate cuts have increased.

Earnings announcements across the US and Europe continue as investors get a firm view into what is happening at companies. Heavyweights Meta (NAS:META) and Microsoft (NAS:MSFT) reported overnight and the market seems to have been pleased that there are signs that AI spend is driving revenue, which has been a key focus in those assessing results. They were both up strongly in response. Next week, we’ll start to transition to the domestic reporting season.

It’s important to realise that much of what is announced in these earnings announcements doesn’t impact the long-term value of these companies, despite the sometimes large market moves around them. These announcements might be what creates convergence of prices to what is deemed to be fair value, or the news that creates the separation between price and value and the opportunity to pick up bargains. We identify these mispricings through our Valuation Driven Asset Allocation framework.

So where is our process pointing at the moment? A position worth calling out is our growing allocation to global healthcare companies and specifically pharmaceutical companies. At the moment there are a number of pressure points within healthcare, including:

  • Policy uncertainty in the US and specifically the appointment of Robert Kennedy, Jr. as a key figure in the Trump Administration. Trump himself wants lower drug prices but Kennedy has long been critical of big pharma—be it around vaccines, over prescription of drugs and pricing. This has not been seen as a positive by the market.
  • The seemingly perpetual issue in the pharma-drug pipeline and the lack of confidence in the development of therapies outside the weight loss wonder drugs.
  • Related to this is the impact of weight loss drugs on other therapies, and the extent to which solving weight issues for many means less people with heart disease and other conditions and the flow on impact from that.
  • The biotech sector having funding issues because of increased interest rates and as a result less ability to move through the stages of development.

Now all of this sounds terrible for the industry, but this bad news moves into share prices quickly. If you take a more balanced approach and give yourself a long time frame, the industry starts to look a little less negative and turns into a situation where the price doesn’t reflect the long-term fundamentals.

We see a lot of this noise as overdone and a situation where even if you factor in some unknowns there are some bargains across the sector, and we are increasing our exposure to some high-quality businesses like Pfizer (NYSE:PFE), Merck (NYSE:MRK) and Bayer (XETR:BAYN)—good businesses at good prices!

That’s all this week on the Market Minute! See you next time.