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While all investors are likely concerned about the fallout from a potential FOMC interest rate hike as early as September, perhaps no demographic of the investing world is more concerned than biotech shareholders. Biotech stocks have long been seen as high-risk/high-reward stocks. Therefore, should biotech investors be worried about the potential “risk-off” trading environment following the Fed’s first rate hike?
Bank of America analyst Ying Huang looked back at the sensitivity of the Nasdaq Biotechnology (INDEX: NBI) index and large-cap biotech stocks Amgen, Inc. (NASDAQ: AMGN), Celgene Corporation (NASDAQ: CELG), Biogen Inc (NASDAQ: BIIB) and Gilead Sciences, Inc. (NASDAQ: GILD) to interest rate hikes over the past 20 years.
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According to Huang, there is no negative correlation between higher interest rates and biotech stock performance. The NBI actually outperformed the S&P 500 significantly during the period of interest rate hikes from June 1999 to June 2000. Although the NBI underperformed the S&P during the rate hike period from June 2004 to July 2006, Huang calculated only a weak correlation between the rate hikes and the NBI.
Large Caps, Less Sensitivity
Huang’s analysis of large-cap biotech stocks showed that they all had a higher negative correlation to interest rates when they were smaller companies. This theory suggests that sticking to large-cap biotech names, such as the ones mentioned above, would be the best way to invest in the sector heading into the next rate hike.
Overall, Bank of America is bullish on large-cap biotech stocks. “Fundamentally the large-cap biotech group is strong given earnings power, new product launches, more predictable regulatory environment, aging population, higher utilization of healthcare, and a renaissance in R&P productivity,” Huang explained.
Bank of America’s top biotech stock picks include:
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