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Market weekly – Healthcare, an investment theme for the coming decade

Both US and global healthcare stocks have outperformed their respective broader markets during the coronavirus pandemic. This is just the start of a long-term trend, says Jon Stephenson, senior portfolio manager for US equities and specialist for healthcare innovators in our Boston office. Daniel Morris, senior market strategist, discusses with Jon why healthcare stands out as the sector that may become the investment theme for this decade.

How have healthcare stocks performed recently?

Jon: Both US and global healthcare stocks have outperformed their respective broader markets during the coronavirus pandemic. This is not surprising as within the stock universe, healthcare is generally classified as a defensive sector, suitable for tough times. The defensive characteristics of healthcare stocks relate to the relative inelasticity of demand for healthcare and the presence of social welfare safety-nets for healthcare spending.

However, within the US healthcare sector there has been a divergence in performance by industry (and sub-industry). This relates to the varying impact of the pandemic on different business models.

Biopharmaceuticals for example have performed well. Although new prescriptions have slowed overall demand remains stable. In addition, the valuation of the biopharmaceutical sector has been given a boost by the unprecedented effort to develop therapeutics and vaccines against COVID-19.

Conversely, performance of medical technology stocks has been less strong. The development of diagnostic testing for COVID-19 in new and large markets is undoubtedly a positive. Valuations of medical technology stocks have however suffered a negative impact due to the very significant fall in elective procedures on account of social distancing and anxiety among patients.

Within healthcare services the performance profile is mixed. Providers have been hurt by a fall in the number of patients but benefited from a trend to lower costs in the sector.  

This environment of divergent industry performance is advantageous for us as an active manager. The very significant differences in the impact of the pandemic on the different sectors and sub-sectors within the universe of US healthcare creates numerous opportunities.

How has the Healthcare Innovators strategy performed?

Jon: Our healthcare innovators strategy has performed well. When the pandemic hit we made some minor adjustments. In response to the fall in the volume of elective surgery we reduced our exposure to medical technology stocks who are more exposed to this activity.

In view of the rise in market risk we made precautionary reductions in any holdings with higher levels of financial leverage. We also increased our weighting in the larger cap pharmaceuticals as a defensive play.

Otherwise, we maintained the core positioning of the strategy which is levered to innovative secular themes within US healthcare, many of which have accelerated recently in the face of the pandemic.  For instance,

  • Rapid advances in the development of therapies and vaccines.
  • Development of diagnostic test kits and a ramping-up of supply chains.
  • An acceleration in the on-boarding of physicians and patients to rapidly expand telemedicine (everything related to the practice of caring for patients remotely).
  • Integrating home patient-monitoring capabilities to handle COVID-19 patients.

Valuations of the companies that had solutions to these issues rose significantly. This drove solid performance for the healthcare innovators strategy over the last few months.

What are your thoughts on the long-term prospects of US healthcare stocks?

Jon: I believe that US healthcare stocks offer decent potential. Here’s why:

  • Strong growth potential given:
    • Ageing populations.
    • Changing lifestyles.
    • Wealth effect within emerging markets.
    • The power of healthcare innovation, which is constantly creating new markets.
  • Downside protection: As a sector healthcare also continues to offer defensive properties during risky periods. It tends to outperform during downturns. That is an important attribute for the current environment where the range of possible outcomes is very large. 
  • The presence of powerful innovative trends
    • Advances in genetic sequencing are enabling biopharmaceutical solutions for previously untreatable conditions.
    • Advances in drug delivery are enabling scientists to contemplate curative (rather than palliative) intent with their medicines.
    • Advances in miniaturisation and automation are driving improved diagnostics, robotic surgery and other device modalities.
    • The power of big data is enabling development of smart medical devices and diagnostics
    • Innovation within the healthcare delivery system is enabling more integrated, potentially more cost effective care.

In summary, we think now is a good time to invest in US healthcare stocks.

Further reading on US healthcare stocks:

Why now is a good time to invest in healthcare

Also, listen to the Market Weekly podcast with Jon Stephenson, ‘Healthcare, an investment theme for the coming decade’.

Any views expressed here are those of the speakers as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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