Healthcare stocks offer a prescription for resilience plus growth

Healthcare stocks rank high on our like list, boasting a history of resilience amid both inflation and recession as well as attractive growth prospects thanks to potent innovation. Dr. Erin Xie examines the opportunity.

Healthcare is one of life’s necessities as well as a critical element of equity portfolios today, particularly as investors seek resilience in the face of macroeconomic turbulence. Dr. Erin Xie, lead portfolio manager of the BlackRock Health Sciences Opportunities Fund, addresses key questions for those with an investment ― or a healthy interest ― in healthcare stocks.

What makes healthcare a compelling opportunity now?

The sector has a history of stability and outperformance during periods of both recession and inflation, as healthcare demand has historically held firm regardless of economic conditions. Over the last seven recessionary periods in the U.S., healthcare outperformed the broader market by an average of 10%.¹ The sector also has demonstrated relative resilience during inflationary episodes.

Yet the opportunity goes beyond the defensive. We view healthcare as a long-term, structural growth sector driven by global aging trends. And we see opportunities to invest in a wide variety of companies, ranging from large to small and from stable to innovative. It’s this prospect of diversification ― as well as the global nature of the sector ― that makes healthcare a sector for all scenarios, in our view.

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, yet the sector remains at a 10% discount to global equity markets compared to an average premium of 3% over the past two decades. (See the chart below.)

Healthcare stocks available at a discount
Relative valuations, global stocks vs. healthcare sector, 2002-2023

While the world’s major economies have avoided recession so far, one reason for concern has been the inversion of bond market yield curves (when short-term yields are higher than long-term yields). This has historically been an omen for recession.

Quantitative researchers in BlackRock Fundamental Equities looked at Russell 1000 sector performance 24 months following prior yield curve inversions and saw good performance from healthcare. It is lagging so far in this cycle, which we believe makes for a more attractive entry point into a well-priced and recession-resilient sector.

What are some of the exciting areas of healthcare innovation?

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.

Our analysis suggests new therapies for diabetes and obesity could add more than $100 billion of revenue to the $1.5 trillion prescription drug market. These drugs have quickly 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.

Strong breakthroughs within oncology include the development of new antibody-drug conjugate treatments, with impressive clinical data emerging. And the mRNA technology that produced vaccines capable of combating COVID-19’s evolving variants is being repurposed to create potential treatments for cancer as well as diseases associated with aging.

We expect Alzheimer’s to become more prevalent as the global population ages ― the number of people aged 80 years and over is projected to triple, from 143 million in 2019 to 426 million in 2050, according to the UN. New antibody treatments showed great promise in late-stage trials, and we believe this will attract more investment to the area.

Diabetes impacts 10.5% of the global adult population. This is expected to approach 13% by 2045.² We see exciting new treatment options here, as well as new technology. Continuous glucose monitors allow patients to manage their diabetes via real-time glucose data feedback without having to endure painful finger pricks. These devices are getting smaller and more effective, and there is the near-term potential for diabetes data to be displayed on smart watches.

How does COVID-19 continue to influence the sector?

Innovation within the sector and adoption of new technologies has significantly increased since the 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 aided by an easing labor shortage. 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 recovered to pre-COVID levels, and we see adoption accelerating.

Technological developments in minimally invasive procedures have advanced patient outcomes and present attractive investment opportunities. This technology enables smaller incisions and faster recovery times for neurosurgery, cancer surgery, endovascular and gynecologic surgery, among others. We expect this market to grow over time.

What are the key risks to the healthcare sector?

Regulatory risk is always top of mind for healthcare investors, especially around U.S. election seasons. But we see muted risks at the moment. A known entity seeking a second term, in this case President Biden, lends some stability that should benefit the sector, in our view.

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, both internally ― resulting in strong product pipelines ― and by purchasing smaller companies that have developed proven new treatments.

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.