Summary of Key Points
Recently, the innovative pharmaceutical sector has seen consecutive significant gains, leading many to wonder if a reversal has begun. The conclusion is that what we are experiencing is more of a rebound rather than a true reversal. This rebound is the result of a combination of four factors: policy support, low valuations, positive expectations for mid-year reports, and fund shifts from higher-valued sectors to lower-valued ones. The sector is now at a historical low, and the risk of a systematic sharp decline has largely diminished. However, three key signals are needed to confirm a true reversal.
In terms of investment strategy, Hong Kong stock market ETFs focused on innovative pharmaceuticals offer the best value for money. It is recommended to buy on dips and avoid chasing high prices.
1. Current Situation: A Rebound, Not a Reversal
The difference between a rebound and a reversal is like the temporary relief of a cold and a complete recovery from an illness: a rebound is a short-term price correction, while a reversal represents a long-term upward trend. Why isn't this a reversal yet?
- Sector Rotation for Momentum: Some of the funds driving the rise have come from high-valued sectors such as AI and computing power. If AI gains momentum again, these funds could quickly shift to other areas, potentially causing the innovative pharmaceutical sector to experience a pullback.
- Historical Patterns: Reversals in the innovative pharmaceutical sector usually follow a W-shaped pattern (repeated bottoming out), rather than a sharp V-shaped increase, indicating that the sector's strength needs to be tested multiple times.
- Uncertain External Factors: The pace of interest rate cuts by the Federal Reserve is uncertain. Since innovative pharmaceuticals are considered long-term assets, a delay in rate cuts could suppress their valuations.
- Uneven Performance Among Companies: Not all companies in the sector have seen gains, indicating that there is still differentiation within the industry and it has not fully stabilized.
2. The Four Forces Behind the Rebound
There are solid reasons supporting this rebound:
1. Policy Support:
- Biomedicine has been designated as an "emerging pillar industry," elevating its status.
- Centralized procurement policies no longer include innovative drugs within their patent periods, alleviating concerns about price cuts.
- The addition of a "pre-application" option to the medical insurance catalog allows unapproved drugs to be considered for inclusion, speeding up their entry into the system.
- Commercial insurance companies are expanding their coverage of innovative drugs, further reducing pressure on prices.
2. Valuations at Historical Lows: The WanDe Innovation Pharmaceutical Index currently has a price-earnings ratio of around 36 times, with a valuation percentile of only 10.38% over the past five years, meaning prices are relatively cheap compared to historical levels. Additionally, many companies (such as China Biopharmaceuticals and Hengrui Medicine) have announced share repurchases, signaling that valuations are undervalued.
3. Strong Performance: The BD (business development) segment is performing exceptionally well, with upfront payments for licensing reaching $5.3 billion in the first five months of this year, nearly 80% of last year's total. These payments directly contribute to profits.
4. Fund Shifts: Funds seeking lower valuations have moved into the innovative pharmaceutical sector, as sectors like AI and computing power have become overvalued.
3. Three Key Signals Needed for a Reversal
To confirm a reversal, at least two of the following three signals must appear:
1. Index Stability: The index should not hit new lows during corrections (indicating strong buying interest) and should see increased trading volume during gains.
2. Positive Mid-Year Reports: Many biotech companies are reporting significant profit improvements, indicating that industry fundamentals are improving.
3. Sustained Capital Inflow: There should be a continuous increase in net purchases of innovative pharmaceutical ETFs, as well as a rise in public investment in the sector and increased holdings by long-term investors (such as insurance companies and social security funds).
4. What for Ordinary Investors?
For ordinary investors, Hong Kong stock market ETFs on innovative pharmaceuticals are the best option:
- Authentic Assets: The Hong Kong market includes leading companies like BeiGene and CStone Pharmaceuticals that have expanded their international business.
- Risk Diversification: ETFs hold a portfolio of stocks, reducing the risk associated with any single company.
- Investment Strategy:
- Short-term: Consider using a "trade-and-recover" strategy (sell part of your position at higher prices and buy back when prices fall).
- Long-term: Focus on companies with positive cash flows or sufficient funds for two years of research and development, as they are more resilient to risks.
- Be Cautious: Re-evaluate the investment strategy if the index falls below previous lows or if mid-year reports fail to meet expectations.
(Note: The above analysis is for informational purposes only and does not constitute investment advice.)