As 2024 unfolds, the healthcare investment terrain is poised for transformation, driven by expectations of declining interest rates, as indicated by Bret Schiller, the Head of Healthcare Corporate Client Banking & Specialized Industries at J.P. Morgan.
“We think that rate cuts will start by the second, third quarter,” remarked Schiller, anticipating a shift in monetary policy. The Federal Reserve, in mid-December, already signaled its intention to implement three interest rate cuts throughout the year, as reported by The Wall Street Journal.
This impending shift opens up new opportunities in contrast to the outset of 2023, where Moody’s predicted a 20% increase in interest expenses for most low-rated healthcare companies. The inverse relationship between interest rates and valuations is expected to play a pivotal role, with rising rates typically leading to lower valuations.
In 2023, hospitals faced challenges not only from high-interest rates but also from the soaring cost of labor. However, by the end of the year, signs of improvement in the labor cost situation began to emerge.
As interest rates rose to combat inflation, service organizations within the healthcare sector, including IT companies, delayed initial public offerings or witnessed a slowdown in sales activity, according to Schiller. Products may have been stockpiled, and he noted, “Eventually, they have to transact.”
The cost of debt has been a barrier, and as interest rates are expected to decrease, organizations that have been cautious about raising funds or bringing services and products to market are likely to find a more favorable financial landscape. Schiller highlighted that some entities are gearing up for sales and capital market activities, eagerly awaiting the first Federal Reserve rate cut.
The prospect of avoiding a recession is also bolstering optimism, translating into improved statistics on the consumer and retail side. Despite positive trends, discussions about potential layoffs loom in the background.
Drawing on his 16 years of experience in healthcare banking, Schiller, who joined J.P. Morgan during the onset of the COVID-19 pandemic, emphasized the unique dynamics of the current presidential election year. He noted a relatively “benign” impact on investment, with neither political party vigorously advocating for significant changes, except for discussions around insulin and drug policies. Unlike previous elections, there have been no sweeping calls to abolish Obamacare.
Looking ahead, Schiller expressed excitement about the prospects of the new year, contrasting it with the slow pace experienced in capital and M&A activities over the past year. The evolving financial landscape and the anticipation of interest rate adjustments are expected to inject momentum into the healthcare sector, setting the stage for a dynamic year ahead.
