Healthcare is historically seen as a defensive sector for equity investors because demand for its products and services is typically not dependent on a strong economy.
But as investors worry about a slowdown of economic growth going into 2024 on the back of elevated interest rates implemented by central banks to contain inflation, healthcare has been one of the worst performing sectors year-to-date.
The MSCI World Health Care index is down 2.54% whereas the wider global equity benchmark index MSCI World is up 16.54% in US dollar terms.
Investors typically get less interested in the healthcare sector after a period of underperformance, however it is exactly when investors should be more interested, according to Andy Acker (pictured), a portfolio manager at Janus Henderson.
In a recent investor update, he outlined why he thinks the sector could be well positioned going forward given the current economic backdrop.
As high interest rates work its way through the economy and the economy potentially falls into recession, “that’s when I think the defensive characteristics of the healthcare sector really rise to the fore and become more appreciated,” he said.
“At the same time, the valuations in the sector are at significant discounts to the overall market, whereas historically, they trade at premiums because of their durable nature of growth in the sector.”
Another reason for his optimism on the sector is due to the “wave of innovation” taking place in the health care industry where a “revolution in biology” is driving many new products.
He said: “This year we think will be a record year for new products; as many as 80 could be coming to the market. And this is driving a whole new product cycle in healthcare that we think could drive growth, not just for the next few years, but for the next decade or more.”
Cash cows
However, it is not just new products that are promising for companies within the healthcare industry, it is the steady cash generated from their existing products too, that is appealing for some asset managers.
Josh Duitz (pictured), head of global income at abrdn, told FSA that one area of the market where he thinks investors are underestimating the potential for strong dividends is within the healthcare industry.
“We find several companies in the healthcare industry that I think could actually raise their dividend more than the public expects, because they have really strong balance sheets, they’re inexpensive, and they are cash cows right now,” he explained.
“The reason they’re so inexpensive is because they have drugs that are coming off patent, but they’re still cash cows. They are seeing all this cash come in, so we think they have the ability to raise their dividends.”
“The market is so focused on their drugs that are coming off patent, and not focusing on the pipeline and the cash flow at hand,” he added.
Indeed, major pharmaceutical firms such as AbbVie, Johnson & Johnson and Sanofi all have major drugs that have faced, or are about to face, patent expirations this year.
Abrdn recently completed an acquisition of US specialist healthcare fund manager Tekla Capital Management, and Duitz said he will be working with Tekla’s healthcare specialists more closely going forward.
