A healthy investment: Why putting your money in this sector pays off

THE recession drumbeat continues to grow, with many macroeconomic challenges posed by high inflation and aggressive rate hikes remaining.

In such an environment, the healthcare sector is more defensive, and tends to outperform the broader market. Beyond this defensiveness, the sector possesses some growth characteristics as well, coming from the ability to deliver significant innovation to patients.

Resilience of the healthcare sector

The healthcare sector is known for its defensiveness and resilience. The relatively inelastic demand for healthcare services means that earnings tend to be better protected with less severe downside in times of softening economic growth.

Beyond earnings resilience, the healthcare sector has also historically outperformed during periods of market downturns. It is much less prone to massive drawdowns, making it an attractive target for investors looking for assets that can weather a potential downturn.

Furthermore, global demographics support healthcare growth in different ways over the longer term. In developed markets, for instance, an ageing population will require more treatments. In emerging markets, faster population growth is fuelling demand for healthcare products and services as societies become wealthier and the middle class grows.

Not all healthcare segments are the same

The healthcare sector can be broken down into six sub-segments: pharmaceuticals; healthcare providers and services; healthcare equipment and supplies; biotechnology; life science tools and services; and healthcare technology. While we acknowledge the healthcare sector’s overall resilience, there are certain segments that have been more volatile.

For instance, the healthcare equipment and supplies segment had a particularly difficult 2022, being faced with many issues such as staffing shortages, supply-chain disruptions and Covid-19 flare-ups that delayed elective surgery. With a lack of skilled medical professionals, hospitals could not carry out a large volume of medical and surgical procedures, impacting the bottom line of device makers.

However, the segment has since made a recovery, with improved demand for medical devices due to a resumption in non-urgent medical procedures. Improvements in staffing levels at hospitals across the US, along with the easing of pandemic restrictions in various countries, have aided the recovery of procedure volumes.

In its recent first-quarter 2023 results, Abbott Laboratories reported that most delayed non-urgent medical procedures have resumed globally three years into the Covid-19 pandemic. Abbott’s upbeat commentary had in turn lifted shares of other medical device makers such as Boston Scientific, Stryker and Medtronic, which are respectively up by 16.6 per cent, 16 per cent and 14.2 per cent year-to-date, as at May 19.

On the other hand, the pharmaceuticals segment tends to be more resilient, given the necessity for drugs and life-saving treatments. This is in spite of the drug pricing reforms included in the US’ Inflation Reduction Act, which likely brought greater clarity to the sector following years of speculation.

A golden age of healthcare innovation and growth

While the healthcare sector is commonly known for its defensive attributes, there is still some growth potential, coming from the ability to deliver significant innovation to patients. Ongoing advances in the understanding of diseases and the development of novel treatments are growth drivers going forward.

Over the recent years, the number of US Food and Drug Administration (FDA) approved novel drugs has remained robust. To further encourage research and development, regulators have created pathways that accelerate the review process for medicines targeting high unmet medical needs.

The availability of these new drugs and biological products means new treatment options for patients and advances in healthcare. These can result in additional monetisation opportunities in time to come.

Obesity is one area that is experiencing new ground-breaking treatments. Drug innovations aimed at helping obese adults manage their weight are coming to market, led by Danish multinational Novo Nordisk and US-based Eli Lilly. 

Novo Nordisk was the first to introduce an effective treatment to help people lose up to 15 per cent of their weight. Eli Lilly will also seek approval of an obesity drug, Mounjaro, after a late-stage study showed that the drug can slash a person’s body weight by almost a sixth, raising hopes for a new blockbuster treatment to tackle the global obesity epidemic.

Such medications come at a time of need. Obesity is the most prevalent chronic condition, affecting an estimated 650 million adults globally. There has also been acknowledgement that many are unable to lose significant amounts of weight through diet and exercise alone.

Putting your money in the health-care sector pays off

We have entered a period of an economic slowdown, partly brought about by restrictive monetary policy to combat inflation. With global economic challenges and much uncertainty ahead, we believe that the defensive characteristics of the healthcare sector coupled with solid organic growth in companies should provide potential for outperformance against the broader market.

Investors who are keen to take part in the growth of the global healthcare sector may consider the iShares Global Healthcare exchange-traded fund, which provides exposure to a basket of pharmaceutical, biotechnology and medical device companies across the world.

Those who prefer to gain exposure to the global healthcare sector through an active approach may instead consider the BlackRock World Healthscience Fund.

The writer is a senior research analyst of the research and portfolio management team at FSMOne.com, the business-to-consumer division of iFast Financial, which is a subsidiary of Singapore Exchange mainboard-listed iFast Corporation.