The investment landscape for the pharmaceutical sector has experienced a notable shift as fund managers and institutional investors are ramping up their interest in this previously underperforming industryOver the past year, the pharmaceutical sector struggled; many funds saw a decline in value, leaving fund managers hesitant to investHowever, as the new year unfolds, a clear trend has emerged indicating a significant pivot towards pharmaceutical stocks.

As we entered January, large public funds in China appeared to have almost completely mobilized their resources to conduct in-depth investigations into pharmaceutical stocksNotably, several stocks that were jointly researched by multiple funds had not previously been included in these funds' investment portfoliosThis shift hints at a broader need among fund managers to recalibrate their asset allocation, signaling that a turnaround for the pharmaceutical sector may be on the horizon.

On January 7th, a particular stock, Zhenbao Island, indicated that it had undergone joint investigations from several top public funds including Guangfa Fund, Bosera Fund, Huabao Fund, Tianhong Fund, and Haifutong Fund

In the same vein, Ruifeng Fund and Huatai PineBridge Fund were also reported to have shown interestThe scale and intensity of these research activities have been striking, particularly given that many public funds are now targeting sectors that exhibited weaknesses in performance throughout 2024.

This strategy of investigating and identifying potential investments in underperforming sectors is not new; it is a classic ‘high cut low’ strategy among public funds, which involves reallocating resources from overvalued high-growth sectors to undervalued ones with less performanceFor example, many funds that have focused on technology stocks earlier may now be shifting their attention towards pharmaceutical stocks, seeking higher potential returns as undervaluation changes the narrative surrounding these investments.

Statistical data highlights the struggles faced by pharmaceutical-themed funds in 2023, as they often ranked at the bottom of performance charts

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One particularly prominent fund manager, despite executing highly successful strategies in tech-oriented investments, faced a 6% loss in his pharmaceutical fund during the same timeframeSuch experiences have not been isolated incidents; some of the largest public funds saw their pharmaceutical propositions underperforming for four consecutive years, effectively dissuading investors from these assetsHowever, this prolonged weakness has been a driving factor in increasing the interest of fund managers looking for opportunities to flip the script.

It is telling that numerous stocks currently being researched have not garnered any significant backing from funds, indicating that there might be room for substantial market shiftsFor instance, an enormous public fund was persistent in analyzing Zhenbao Island, a stock that had yet to feature among the top ten holdings of any fundWithout any existing investments, the sudden influx of attention might catalyze a seismic change in how this stock and others in similar positions are perceived.

Chen Ximing, the fund manager of Bosera Healthcare Fund, has been specifically investigating a company called Fu Erjia

Intriguingly, this particular stock has not been listed in Bosera's top holdings, and its minimal presence in the fund indicates it could feasibly become a new focal point for investmentChen's healthcare fund manages nearly 2.6 billion yuan (approximately $400 million), underscoring how these research efforts can significantly impact the stock’s market trajectory going forward.

The convergence of newly re-evaluated interest and a backdrop of underperformance creates fertile ground for potential price stimulantsTake Guotai Fund as an example: its three A-share thematic funds discovered new companies within the Hong Kong stock market that were previously overlooked and began incorporating them into their portfoliosThis transition from obscurity to visibility translated directly into a noticeable uptick in stock price for those companies, serving as a prime example of how public sentiment and institutional backing can affect market valuations.

Additionally, with a gradual economic recovery anticipated, fund managers are also identifying opportunities in consumer healthcare, which is increasingly becoming a central theme in public fund investments

Wang Zhengjiao, the manager of Southern Medicine and Health Flexible Allocation Fund, noted that niche areas like cosmetic medicine and ophthalmology are likely to offer ample investment prospects in the futureEven as short-term market fluctuations pose risks, macroeconomic factors are starting to align favorably, driving attention toward sectors that are growing in demand.

The latest trends indicate that after enduring a multi-year downturn, the pharmaceutical industry's prevailing low valuations combined with an emerging recovery might open doors to numerous investment opportunitiesChen Ximing of Bosera Fund has articulated confidence in potential growth, highlighting innovative medicines and related sectors that could benefit from supportive governmental policies and a recovering market atmosphere.

Anticipation around consumer healthcare is evidently rising, with fund managers like Pan Tianqi from Guolian Pharmaceutical Consumer Mixed Fund believing that the necessity of medical services and products remains robust