UBS has issued a cautious outlook for the European medical technology sector, warning that earnings could take a hit if both tariffs and recession fears materialise.
But the bank also sees pockets of resilience, particularly in UK-listed ConvaTec Group PLC (LSE:CTEC), which it flags as one of the few names in the space that may have been oversold.
The Swiss bank estimates that, on average, a combination of trade tariffs and an economic downturn could shave around 16% off sector earnings in 2025.
Medical device manufacturers that export to the United States from Europe are especially exposed, given that products could face import duties of up to 20% under new US trade measures. For companies with manufacturing bases in countries like Switzerland or Vietnam, the tariffs are even steeper.
In the UK, Smith & Nephew PLC (LSE:SN) stands out for its relatively high exposure. UBS calculates a potential 20% hit to trading profit next year due to tariffs alone, mainly because the company manufactures much of its orthopaedic and wound care products outside the US.
However, in the event of a recession, the impact on Smith & Nephew's earnings is expected to be negligible.
That’s because its products are typically reimbursed by national health systems or insurance schemes, a buffer that provides some protection in tougher economic times.
Wound and ostomy care specialist Convatec, by contrast, in a stronger position on both fronts, according to UBS.
Despite having around 10% of its revenues potentially exposed to tariffs, its earnings are likely to suffer less than peers (a projected 4% drop) and it is seen as highly defensive in a recession.
Most of its products are used in chronic care settings such as ostomy and wound management and are reimbursed by health systems, helping to shield the company from shifts in consumer spending. UBS has rated the stock a "Buy," calling its recent share price weakness “unwarranted”.
Elsewhere, other European names with significant earnings risk include Medacta, with a potential 39% hit due to its heavy reliance on exports to the US, and Philips, which UBS sees facing a 20% drop in profits under the combined pressure of tariffs and a slowdown.
GE Healthcare and Siemens Healthineers are also at risk due to their exposure to imaging technologies, a capital-intensive segment vulnerable to budget cuts in a downturn.
UBS believes that about 70% of the earnings risks from tariffs and recession have already been priced into med-tech valuations. However, it sees room for another 10% downside if both threats fully materialise.
Despite the uncertainty, Convatec and Alcon, a Swiss-listed eye care specialist, are singled out as the top opportunities in the sector. Both are seen as operationally resilient, with limited exposure to discretionary healthcare spending, yet have underperformed sharply in recent months.
As governments and health systems brace for slower growth and a more protectionist global trade environment, the Swiss investment bank notes that companies offering essential, reimbursed services will likely fare better than those reliant on high-end, out-of-pocket spending.
For UK investors, Convatec offers one of the clearest examples of that defensive profile - and, in UBS’s view, an undervalued one.