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Perspectives

Boosting your portfolio's immune system with healthcare

Wietse Nijenhuis

By Wietse Nijenhuis

Head - Equity Strategy

January 15, 2019Posted InInvestments, Equities and Investment Strategy

Trying to be healthier in 2019 must be one of the most common New Year’s resolutions of all. While we salute all those who’ve lately signed up for personal training or decided to cut out sugar, we think that such efforts shouldn’t be confined to your physical wellbeing. In our view, early 2019 is a good time to try to boost your investment portfolio’s immune system. Specifically, increasing your equity exposure to the healthcare sector may help mitigate the effects upon your wealth if the global economy and financial markets catch a cold.

Lately, we’ve heard a growing number of sniffles out there. Amid fears for international trade and growth, markets suffered a nasty bout of volatility in the final quarter of 2018. The outbreak proved somewhat contagious, with many equity markets around the world suffering double-digit declines, and some even entering bear market territory. Amid this febrile environment, however, the healthcare sector held up well. It ended 2018 as the year’s highest performing sector globally, and the US market’s top performer for the first time since 1995.

While we do not believe that the economic expansion and bull market in equities are over yet, we believe healthcare’s attributes stand it in good stead in today’s late-cycle environment and in a future downturn. The US healthcare sector has a beta to the S&P 500 Index of 0.69, such that it tends to decline less when the wider equity market drops. The global healthcare sector, meanwhile, saw earnings growth in each of the last three US recessions. And, in years where US earnings per share have contracted, the sub-sectors that make up the healthcare sector have tended to buck that trend - figure 1.

Healthcare’s potential portfolio benefits go beyond defensiveness, however. Certain sub-sectors and investments offer exposure to what we call ‘unstoppable trends.’ An unstoppable trend is a major, multi-year phenomenon that has the potential to transform the world around us. These secular forces are not driven by the economic cycle but by deep, underlying demographic, social, or technological trends. The aging of the world’s population and the growth of the middle class in emerging economies are two unstoppable trends that we believe could continue to assist the healthcare sector over the coming years – see Unstoppable trends in Outlook 2019 for more.

Looking both at today's environment and at the longer-term, therefore, we think that healthcare investments should form part of a diversified portfolio. Depending on your individual objectives, a careful selection of global healthcare holdings might be used to seek growth or yield. Our preference is for global companies with attractive valuations and strong underlying fundamentals. For more details, clients can read Global Equity Strategy: Boost your portfolio's immune system with healthcare by logging in.