2023.02.06 Further upside is limited

The Federal Reserve raised interest rates by 25 bps as expected, the benchmark rate went up to the range of 4.50% -4.75%, the highest since October 2007. The 25 bps rate hike marked a further slowdown in pace of rate increases after the Fed raised rates by 50 bps in December and 75 bps at each of its four meetings from June to November. However, the Fed has suggested that the rate needs to be increased further and remain elevated at least through 2023. According to the US Bureau of Labor Statistics (BLS), wages and benefits rose at a slower pace in the Q4, reflecting the cooling of inflation. Compensation climbed 1% after notching a 1.2% rise in the third quarter. However, the labor market is still solid, the unemployment rate fell to 3.5%, the lowest level for the past 50 years.

The personal consumption expenditure price index (PCE) increased by 5% YoY in December of 2022, the lowest since September 2021 and below 5.5% in November. The PCE Price Index rose 0.1% MoM in December, slightly higher than the expected 0% growth. Although the US mortgage rate has gone on a downward trend, the demand for real estate mortgages fell. According to the Mortgage Bankers Association (MBA)’s data, mortgage applications in the US sank 9% in the week ended January 27th 2023, after rising for three consecutive weeks, with applications falling for refinancing (-7.1%) and purchases (-10.3%). Mortgage applications to purchase homes fell 41% YoY. Inflation has slowed with weaker economic activities, while the inverted yield curve may indicate the recession risk is still high. We believe the market needs time to price in the rise in interest rates and recession risk. S&P 500 index is expected to trade between 3,800 points and 4,400 points.

Although the US is facing a recession, the healthcare sector is less affected by the economic cycle. Investors can pay attention to the performance of this sector.

Novo Nordisk (NVO) is a world leader in the insulin and diabetes care field, with an ~50% market share in the insulin market. The company manufactures and sells a variety of pharmaceutical products, including Victoza (GLP-1), long-acting basal insulins Levemir and Tresiba. In 22, the company’s revenue was DKK 177bn, +26% YoY, and the net profit was DKK 55.5bn, +16% YoY.

The company’s product Wegovy is an injectable prescription medicine used for adults with obesity or being overweight. Wegovy is scheduled to launch in Europe in 23E and is the first weight-loss prescription drug licensed in the US for the past 7 years. Novo claimed the shortage of Wegovy supply has ended in late 2022. FDA (The Food and Drug Administration) has approved Novo Nordisk’s diabetes pill Rybelsus as an initial treatment to lower blood sugar levels. Rybelsus has the same ingredient as Ozempic, but does have better efficacy. This product will allow Novo to become more competitive among peers. We are optimistic about the sales prospects and recommend investors to buy at US$133, target US$150, and stop loss at US$125.

Sanofi (SNY) is an innovative global healthcare company, providing an extensive line of prescription medicines, health-care treatments and vaccines. The company focuses on cardiovascular diseases, thrombosis, diabetes etc. In 3Q22, the company’s revenue was EUR 13.14bn, +21.3% YoY, the gross profit was EUR 9.31bn, +22.6% YoY, and the net profit was EUR 2.08bn, +11.3% YoY.

The Center for Drug Evaluation (CDE) of the China National Medical Products Administration (NMPA) has approved the company’s product of SAR443216 for clinical trials. SAR443216 is a drug for breast, lung, and gastric cancer patients, and the company is conducting phase 1 dose-escalation and expansion of clinical research overseas. On top of that, the US FDA has accepted nirsevimab biologics licence application (BLA) jointly developed by Sanofi and AstraZeneca. Nirsevimab is a single-dose, long-acting antibody designed for newborns and infants who are vulnerable to RSV (Respiratory syncytial virus). Once approved, nirsevimab will become one of the best single-dose preventatives against RSV in the US for newborns. It is recommended to buy at US$44.5, target at US$50.0, and stop loss at US$42.0.