Nourish your Portfolio with Healthcare

Healthcare has outperformed the S&P 500 by 6% and ASX by 18% since the market peak1 and has risen in prominence generally since the outbreak of COVID-19 owing to unprecedented demand for medical equipment and medication and the potential return offered by vaccines and other viral treatments. In addition, ageing populations and medical innovation appear set to support long-term healthcare trends. In our view, a diversified investment approach across healthcare sectors may offer investors the opportunity to enjoy the upside of healthcare investment and also the potential protection of this traditionally defensive investment sector.

COVID-19 impact

While hospital workers are on the front lines fighting COVID-19, behind the scenes numerous companies are working on research to develop antigen testing and a vaccine.  The focus of research within pharmaceutical and biotech companies globally has changed and governments have spent billions of dollars to keep healthcare workers safe, save the lives of patients and seek a cure or treatment.

Up to August 2020, the US government alone had invested over US$8 billion in the search for a vaccine or treatment.

Pharmaceutical companies involved in government-driven COVID-19 projects include Johnson & Johnson, Pfizer, and Abbott Laboratories. In Australia, CSL is seeking a potential COVID-19 vaccine in partnership with the University of Queensland2.

Long-term drivers

Projections of ageing populations and increasing demand for healthcare indicate long-term trends in developed countries globally. Closer to home, the Australian population is ageing, with 15% of Australians now aged 65 and over and the percentage expected to increase steadily. This trend is not unique to Australia – by 2025, 1 in 5 adults in the US will be over the age of 65, compared to 1 in 12 adults in 1985. Based on current estimates, healthcare costs roughly triple after age 65.

These trends and the need for increased expenditure on healthcare products and services will persist regardless of geopolitical tensions, the market cycle, or who wins the U.S. presidential election. This increased spending makes a case for investment in pharmaceutical firms and health care equipment and services providers.

Further, the possibility of breakthroughs or advances in specialist areas of development such as “computational biology”, “machine learning”, and “big data” could lead to new medicines and treatments being available sooner at less cost such as gene therapy, HIV, cancer vaccines, and regenerative medicine.

Valuations and earnings

There are few certainties in life and the same is true for healthcare but demographic trends, the demand for managed care companies and the potential of areas such as “biopharma” appear to be reshaping the global healthcare landscape.

If they happen, medical breakthroughs could provide some drug companies with patent-protected revenue streams for years to come. 

Healthcare valuations look cheap as more policy risk than growth is priced in

Healthcare valuations look cheap as more policy risk than growth is priced in

Source: Bloomberg, BlackRock, as of July 31, 2020. Notes: The chart compares the ratio of price-to-earnings ratios on the S&P 1200 Healthcare Sector Index vs the S&P 500.

Defensive characteristics

Although the sector has traditionally tended to perform well in both late-cycle and recessionary periods (and is therefore sometimes described as a “defensive” sector or a good holding in bad times), the trends and opportunities referred to could – just could -offer an all-weather opportunity. The past two years perhaps provide an insight into this opportunity: in 2019, while the sector lagged the broader market, it was nonetheless still up an impressive 23%. In 2018, however, global equity markets were down 9%, but the sector was up 2%: in short, the healthcare sector’s resilience was on display.

The COVID-19 pandemic has been a global shock and a personal tragedy for many, but it has also highlighted the importance of this sector and healthcare infrastructure generally and of the trends whose direction and gathering momentum appear likely to drive healthcare research, development and demand and make an enticing case for having this sector form part of a balanced investment portfolio.