This ASX sector is facing a tough 2021

The ASX bull market continues its golden run into the new year, but there’s one sector at risk of falling out of the race.

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Fortescue share price Downgrade in ASX share price represented by street sign saying downgrade ahead Hub24 share price

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The ASX bull market continues its golden run into the new year, but there’s one sector at risk of falling out of the race.

The S&P/ASX 200 Index (Index:^AXJO) ended the last trading session of the week with a 0.7% gain with the benchmark adding another 1% in value in 2021.

The nearer-term outlook for ASX stocks is bright. But the analysts at Macquarie Group Ltd (ASX: MQG) don’t quite feel the same way about ASX health insurance stocks.

ASX stocks downgraded by Macquarie

The broker warns that the two listed players in this field are facing a number of headwinds and downgraded the Medibank Private Ltd (ASX: MPL) share price and NIB Holdings Limited (ASX: NHF) share price.

“2021 will be a year of structural pressures for the Private Health Insurance industry,” said the broker.

“Although MPL and NHF will likely fare better than peers we do not expect them to be immune.

“Following a significant re-rating and the tougher outlook, the sector no longer appears undervalued.”

Claims are on the rise

There are three main areas of concern highlighted by Macquarie. First is the claims catchup. Health Insurers experienced a lower level of claims during the months of COVID-19 lockdowns last year.

Industry data indicated that the rebound in claims could happen sooner than what the two companies have been guiding.

Another headwind driving the downgrade

The other issue is the level of “participation”, which reflects the number of people holding private health insurance.

The participation rate jumped in the June quarter of last year as customers retained cover during the peak of the pandemic. At the same time, new customers were also added during the period.

“Our analysis also showed as COVID-19 risks subsided across most of the country, normal industry participation declines (~20-30bps per qtr) recommenced,” explained Macquarie.

“Looking forward, participation declines could accelerate as economic stimulus rolls off, although it is unlikely to be a material step down.”

No insurance against politics

Lastly, the next federal election could prove to be a headwind for the sector. Opposition leader Anthony Albanese is rallying his party for a possible election that he thinks could come later this year.

While Albanese has publicly dumped Labor’s so called “retiree tax” policy, he said nothing about capping private health insurance premiums.

The cap was dangled to the electorate at the last election, and he could use this carrot again to restrict premium increases to 2% a year.

Foolish takeaway

Macquarie believes it is “highly likely” that Federal Labor will have a similar policy this year. The federal election must be called before 21st May 2022.

The broker cut its recommendation on the Medibank share price to “underperform” from “neutral”, and NIB share price to “neutral” from “outperform”.

Macquarie’s 12-month price target on Medibank and NIB is $2.70 and $6.10 a share, respectively.

Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia has recommended NIB Holdings Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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