Last year was quite an eventful one for the U.S. healthcare sector in particular. The economy witnessed the Republican tax reform becoming law and three rate hikes by the Fed. Thanks to both, healthcare was one of the top performers of 2017. The Health Care Select Sector SPDR ETF (XLV) rallied 19.5% year. This momentum is slated continue in 2018.
Moreover, investors no longer have to deal with fears related to over-pricing of drugs, with political voices on this issue mostly absent in recent times. Moreover, a higher number of FDA approvals and continued strong performance from legacy products have been instrumental in boosting gains. Considering all these factors, this might be the right time to bet on healthcare mutual funds.
Tax Reforms Likely to Boost Healthcare Stocks
The much-awaited tax cuts Bill was finally signed by President Trump on Dec 22, 2017 in the Oval office. The Bill permanently slashes corporate tax rates from 35% to 21%. In his comments, Trump pointed out that markets will benefit greatly from this legislation and that “corporations are literally going wild” following the Bill’s passage.
A major aspect of these tax reforms relates to repatriation of trillions of dollars held as cash reserves overseas by companies with global operations at a one-time rate of 8%. This could improve the overall financial health of big drug companies. Analysts have estimated that companies such as Pfizer Inc. and Merck & Co., with close to $100 billion in earnings overseas, would be major winners of such a policy.
Moreover, lower domestic rates would leave such corporations with more cash. This is likely to lead to a surge in mergers and acquisitions in 2018. Moreover, there has been a surge in the number of FDA approvals of late. This means that more cash reserves would lead to a higher number of drug trials in 2018 and consequently, development of newer products.
Finally, domestically focused companies that provide only healthcare services would also benefit from a low tax rate. Companies from the sector with limited international exposure and significant capital expenditures would likely enjoy positive cash flows in 2018.
