Is it Time to Allocate to Healthcare?

by
Desmond Foo

The S&P 500 Healthcare Index has underperformed the S&P 500 by 35% since early 2023. The industry was affected by reduced demand for Covid-related drugs and vaccines, as well as the inability to raise drug prices sufficiently to offset higher costs due to inflation. Looking ahead, the performance gap is likely to narrow, and we recommend increasing one’s allocation to Healthcare.

Healthcare stocks have historically been a safe haven during economic downturns due to consistent consumer demand. The Global Healthcare Index has a 10-year beta of 0.8 relative to the MSCI World Index, which means for every 1% fall in the latter, the Healthcare Index declines 0.8%. This indicates less volatility compared to other sectors like Global Technology and Global Financials, both with betas of 1.1. The sector’s positive outlook is bolstered by an aging population. By 2050, one in six people worldwide projected to be 65 or older – an age group that spends three times as much on healthcare as those younger. Consequently, healthcare expenses are projected to rise, with U.S. spending projected to reach 20% of GDP by 2032, up from 17% in 2022.

Increased spending has contributed to significant innovation within the sector. Over the last two decades, the U.S. Food and Drug Administration has doubled its drug approvals, hitting an annual record of 73 in 2023. In addition, generative AI has enhanced drug discovery, reducing time and costs involved, and mitigating the impact of numerous expiring drug patents near the end of the decade. Healthcare earnings, after a poor Q1, are expected to rebound by year-end (see top chart). From a valuation standpoint, the sector’s recent underperformance against the broader benchmark has brought valuations down to one standard deviation below the 20-year average, presenting an attractive entry point (see bottom chart).

In conclusion, we recommend allocating to Healthcare as it offers some form of protection against market downturns and benefits from structural trends such as aging population and increased healthcare spending by governments. Investors will also be able to capitalize on recent advancements in AI which acts as an enabler in healthcare innovation.


DISCLOSURES

The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to this information’s accuracy, completeness, or reliability. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth nor the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results. This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred.  Returns do not include reinvested dividends.

The S&P 500 Health Care Index comprises those companies included in the S&P 500 that are classified as members of the GICS® health care sector.  The index Launch Date is Jun 28, 1996. All information for an index prior to its Launch Date is hypothetical back-tested, not actual performance, based on the index methodology in effect on the Launch Date. Back-tested performance reflects application of an index methodology and selection of index constituents with the benefit of hindsight and knowledge of factors that may have positively affected its performance, cannot account for all financial risk that may affect results and may be considered to reflect survivor/look ahead bias. Actual returns may differ significantly from, and be lower than, back-tested returns.

The Standard & Poor’s 500 (S&P 500) Index is a free-float weighted index that tracks the 500 most widely held stocks on the NYSE or NASDAQ and is representative of the stock market in general.  It is a market value weighted index with each stock’s weight in the index proportionate to its market value.

The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.

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