Health care stocks offer a prescription for uncertain times
With persistent inflation and high interest rates stoking fears of an impending recession, investors are flocking to defensive stocks that can weather economic storms[1] – and health care businesses are arguably the most resilient of all.
Companies in the sector have shown more robust earnings during downturns than those of any other major industry, including defensive favourites such as utilities and consumer staples. Health care is now also getting a boost from the growing spend on health, wellness and vaccines in the wake of the pandemic and as a result of fast-aging populations in many major economies.
Accordingly, the MSCI World Health Care index had as of 30 June this year achieved a 50% greater gross return in US dollar terms than the MSCI World index since June 2008.[2]
As a consequence, 64% of investment decision-makers at global financial institutions expect health care stocks to deliver strong returns over the next three years, according to an investor survey commissioned by EquitiesFirst and carried out by Institutional Investor.
This wide-ranging study provides insight into how over 300 investors – including asset managers, foundations, pension schemes and endowments – are responding to dramatic shifts in the macroeconomic and geopolitical environment.
Bright outlook for health care
The only sector inspiring greater investor optimism than health care is technology, the report shows. Meanwhile, there is scant enthusiasm for industries more susceptible to high interest rates and slowing economic growth – notably real estate and finance.
There are reasons behind this optimism. The structural factors driving health care’s past outperformance remain firmly in place. If anything, populations are aging even faster, and health care spending in developing countries looks set to accelerate given the rapid growth of their middle classes, especially in Asia.[3]
The Covid-19 pandemic also helped accelerate technological advances in medical devices and drugs, with researchers now exploring the use of mRNA vaccines for a variety of other diseases.[4] As more treatments are developed for thousands of previously untreatable diseases, health care spending can be expected to increase further.
This trend could blur the lines between the two categories where investors tend to place health care stocks. On one side are pharmaceuticals, managed care and medical equipment suppliers, which are regarded as steady defensive plays. Meanwhile, the likes of biotech firms and AI-based health care providers are seen as high-growth stocks that traditionally fare badly when interest rates are high.
Technology has changed the game
That dichotomy may no longer be relevant, however, as emerging technologies transform everything from drug development to patient care.[5]
Advances in 3D printing have paved the way for customisable treatments;[6] robots and less invasive techniques are revolutionising surgery;[7] and AI and cloud computing is powering telehealth services in low-income countries and remote locations.[8]
What’s more, innovations in diagnostics and emerging life-science tools are making it possible to identify diseases at an earlier stage, while big data and analytics are supporting the push to prioritise preventative health care.
Investors must, however, be alert to headwinds facing the sector.
Not least of these is that governments will scale back health care spending following bumper outlays during the pandemic. There are also growing questions over how medical and medtech companies can access patient data to run their business models or create new products amid rising concerns over the need to maintain the privacy of sensitive information.
What’s more, governments are working on market reforms to make drugs more affordable, which could eat into pharmaceutical companies’ profit margins. The realignment of global supply chains as a result of geopolitical shifts could also drive up drugmakers’ costs.
A selective approach to investing can therefore be beneficial, and there is no lack of choice when it comes to health care sub-sectors and themes. As well as defensive strategies focusing on established players, investors can choose from the dizzying array of small-cap and private companies that are working on emerging technologies and novel use cases.
For equities investors looking to boost returns by going global – another finding from the EquitiesFirst x Institutional Investor study – the MSCI World Health Care index contains 142 large- and mid-cap constituents from 23 countries.
While health care may be seen as a defensive sector, it is also extremely dynamic, characterized by rapid innovation and a fast-changing regulatory landscape. Investors must be prepared to manage their portfolios and adapt quickly to a shifting industry and environment.
One way to do that is by accessing securities-backed financing. By using their securities or digital assets as collateral, long-term investors can obtain relatively stable, cost-effective capital with no restrictions on the use of proceeds, including equity investments in new health care themes or technologies. Given how fast these opportunities evolve, this kind of flexible funding can be a valuable tool for investors looking to preserve and grow their wealth during tumultuous times.
[1] https://www.wsj.com/articles/investors-flock-to-safety-plays-but-stock-fomo-lingers-f821acbd
[2] https://www.msci.com/documents/10199/c41a73d1-9037-4dbd-a175-703d3bb77ae6
[3] https://www.bloomberg.com/news/articles/2021-09-02/more-than-1-billion-asians-will-join-global-middle-class-by-2030
[4] https://www.nature.com/articles/s41591-021-01393-8#:~:text=mRNA%20can%20be%20engineered%20not,related%20to%20the%20immune%20system.
[5] https://www.alliancebernstein.com/corporate/en/insights/investment-insights/redefining-offense-and-defense-in-equities-the-evolution-of-technology-and-healthcare.html
[6] https://pubmed.ncbi.nlm.nih.gov/30767736/
[7] https://www.mayoclinic.org/tests-procedures/robotic-surgery/about/pac-20394974
[8] https://www.ft.com/content/cdc166d4-6845-11ea-a6ac-9122541af204
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