Diagnosis: Big opportunity in healthcare stocks

  • BlackRock Fundamental Equities

Healthcare is both one of life’s necessities and also the lifeblood of equity portfolios – especially as investors seek resilience amid macroeconomic turbulence. Dr. Erin Xie, Lead Portfolio Manager at BlackRock Health Sciences, answers the big questions facing healthcare investors today. 

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What makes healthcare a compelling opportunity now, particularly amid high inflation and slowing economies?

The healthcare sector has a history of stability and outperformance during periods of both recession and inflation, as healthcare demand has remained stable regardless of macroeconomic conditions. Global healthcare earnings growth has been steady and above the market average historically. [See the chart below.] And the healthcare sector also has a history of resilience during inflationary periods. We view healthcare as a structural growth sector, driven by global aging trends.

Global sector earnings growth, Dec. 2020 – April 2023

The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index. Sources: BlackRock, data from Bloomberg, May 2023. The chart shows 12-month trailing earnings-per-share growth re-based to 100 for select sectors of the MSCI World Index.

Should investors expect to pay up for this kind of opportunity?

Healthcare stocks are not expensive today and, in fact, are priced below the broader market. Slowing economies call for the resilience that healthcare companies can offer, in our view. Yet the sector remains at a 10% discount to broad global equity markets compared to an average premium of 3% over the past two decades.1

We shouldn’t confuse “defensive,” with “boring.” What are some of the exciting areas of healthcare innovation you are monitoring?

We are seeing some incredible developments in potential treatments for the world’s most prevalent and fast-growing diseases, such as cancer, diabetes, Alzheimer's and obesity. Decades of genomics research are now paying off, leading to a deeper understanding of the root causes of diseases as well as a new wave of medicine.

For example, new therapies for obesity and diabetes could add more than US$100 billion of revenue to the US$1.5 trillion prescription drug market, according to our analysis. These drugs have rapidly become some of the fastest-growing medications in the pharmaceutical space. Originally developed to treat diabetes, they have had the added benefit of promoting weight-loss.

Can you expand on med-tech opportunities and explain how COVID-19 continues to influence the sector?

Innovation within the sector and adoption of new technologies has significantly increased since the COVID-19 pandemic. Innovation is particularly evident among diagnostics, robotics and minimally invasive surgery companies. Demand for devices has picked up as hospitals try to clear the backlog of procedures delayed during the pandemic — a process that is aided by an easing labor shortage. Yet we also see investment opportunities among healthcare providers who are seeking to innovate to gain greater efficiency and mitigate future labor supply problems. Robotic-assisted surgery volumes have already recovered to pre-COVID levels, and we see adoption accelerating.

What are the key risks to the sector?

Patent expiration is a risk to the recurrent revenues of drug companies. This is when competitors are legally allowed to copy a drug and introduce cheaper versions to the market. So we focus on those companies that have the financial muscle to invest in research and development and a strong track record of successful innovation.

This highlights the importance of selectivity when investing in healthcare. Earnings are driven by powerful, long-term demographic trends, but not all companies can capitalize. We believe a deep understanding of the science behind each company is key to unlocking investment insights and finding both resilience and growth.

1Source: Bloomberg, May 2023. Based on MSCI World Healthcare valuations vs. the MSCI World, on an average year-ahead price-earnings basis.

Dr. Erin Xie
Lead Portfolio Manager at BlackRock Health Sciences