PPH Might Be Too Safe For A Recovering Market (NASDAQ:PPH)

The VanEck Vectors Pharmaceutical ETF (NASDAQ:PPH) is probably the best way to play the big pharma slice of the healthcare market listed on markets. However, big pharma presents two problems: everyone already thinks its resilient, and therefore it’s performed well in 2022, and big pharma may not be where you want to invest longer term as regulators ratchet up pressure on healthcare costs. Ultimately, markets are looking up as the most telegraphed bull case comes into action with a soft landing, so don’t go with PPH which is defensive and ultimately not that secularly well-positioned.

2023 Markets

The 2023 markets are still harangued by supply side pressures in the energy industry. OPEC knows it has the cards and it continues to keep supply low fearing no riposte from the US, which is powerless to do anything and also seeing its oil lobbies happy with sending their own oil into a tight market. Dollarisation of oil markets also helps the USD as oil and gas are the hot commodities.

However, in every other arena, including semiconductors which is where much of the supply shortages started, things are beginning to become more abundant again. Inflation is consequently easing, and luckily inflation expectations are easing too – no wage-price spiral. Corporate profits slowed, but are still high broadly speaking, and job growth continues. This is the best possible scenario that we could have hoped for and the bear cycle has few reasons to go on.

Not PPH

The way to play a recovery would be to start buying beaten down tech stocks. Firstly, dilution effects from options in compensation arrangements are lessened by lower prices, so anti-reflexivity, and secondly there are plenty with great economics that will benefit from greater business confidence. Plenty have grown throughout the economic concerns of 2022 as rates began to rise. Take Similarweb (SMWB), for example, which we cover on SA. These high beta stocks will recover well in response to greater market certainty, and with beaten down prices and the possibility of a reversal of the liquidity throttle when the economic coast is clear, things could go very good for these segments of the market and provide opportunities for establishing nice stakes in companies with the power to generate generational wealth.

PPH does not fit these criteria at all. PPH is not particularly levered to an economic recovery as they’ve performed well throughout 2022 and no one thought that healthcare would run into major issues in the face of a serious recession under the hard landing outcome.

Moreover, regulation around big pharma is mounting. In 2026 the financial impacts are going to start to be felt for some of the largest blockbuster products, and the landscape should start to change to favour the opposite of a large-cap approach. Moreover, issues like senior exposure to products will become more important, and the considerations in healthcare capital allocation will change. We detailed the regulatory developments in our last article on PPH here.

Bottom Line

A large cap pharma approach is probably not the best anymore, and in general one should count on pretty motivated regulatory reform around the cost of healthcare in the US which is exorbitant and unnecessarily high relative to the rest of the world.

With a soft landing situation increasingly probable, and markets finally realising that after coming back from the holidays, PPH is also not particularly levered to the general recovery of a beaten down market. It’s just not that appealing, we think ETF investors will get better deals in tech focused ETFs, or even just in the general US market.

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