MedTech & Healthcare Service Sector: Valuations within acceptable range; focus on ROE expansion and M&A discipline

We look at valuations in the medtech & healthcare service sector. So far, US policy has not particularly affected sales at companies in our coverage, and we assume US healthcare-related policy will continue to have little impact on their earnings. We think the recent volatility in valuations is due mainly to market factors, as healthcare stocks valuations appear to be inversely correlated with AI-related stocks. Current valuations in the medtech & healthcare service sector are slightly higher than TOPIX but within an acceptable range if EPS expands over the longer term, as we think the sector sales growth could remain consistently higher than TOPIX. However, the sector ROE is lower in Japan than in the US partly because of post-pandemic changes in the external environment, regional differences in market growth rates, and an increase in expensive M&A targeting early- to mid-stage businesses of overseas companies owing to forex effects, and subsequent struggles or prolonged periods to re