Healthcare equities could offer investors an attractive combination of structural growth and portfolio diversification following four years of underperformance.

According to Yashica Reddy, investment director at Schroders, the sector’s relative weight in equity markets has fallen close to record lows as investor capital has gravitated towards higher-momentum areas such as AI and defence.

In contrast, just five US tech megacaps accounted for almost 20% of the MSCI ACWI global index as of the end of July 2026, highlighting the concentration risk facing global equity allocators.

Healthcare now trades at one of its steepest relative discounts to the broader market in more than two decades, despite historically commanding a premium due to its earnings stability and high returns on equity. “History suggests multi-year relative underperformance in high-quality defensive sectors rarely lasts forever,” said Reddy. “It creates the coiled spring for future outperformance.”

She believes this is therefore a potentially attractive entry point as regulatory headwinds ease and fundamental earnings drivers re-emerge.

Diversifying away from tech

Beyond valuations, healthcare offers investors exposure to long-term growth drivers that are less dependent on the economic cycle.

A rapidly ageing global population is increasing demand for medical care, therapies and devices, providing the sector with a structural and relatively non-cyclical source of growth.

Healthcare can also help address growing technology concentration within portfolios. Its 52-week return correlation with tech stands at just 0.19, said Reddy, suggesting allocations to the sector could provide diversification if momentum in mega-cap tech stocks falters.

“The window to allocate is when the asset class is deeply unappreciated, not after the broad market has already rotated back into it,” she added.

Meanwhile, she sees some of the political and regulatory uncertainty that has weighed on healthcare valuations starting to recede.

Recent discussions between pharmaceutical companies and the US administration point towards a more manageable policy backdrop, while Medicare drug price negotiations under the Inflation Reduction Act have proved less severe than initially feared.

With pricing and tariff concerns easing, large pharmaceutical and biotech companies have already begun to re-rate towards their 10-year relative valuation averages, Reddy explained.

Biotech opportunities emerge

The improving backdrop could also provide a catalyst for biotechnology and life sciences companies.

Reddy highlighted that large pharmaceutical groups face around US$400 billion of revenue at risk from patent expirations over the next eight years, creating pressure to acquire or license new drugs to replenish their pipelines.

Improved funding conditions and successful clinical trials should also benefit life sciences tools and services companies that provide equipment, research services and other infrastructure supporting drug development.

Importantly, Schroders believes the cycle hasn’t reached speculative territory. “Public biotech valuations remain disciplined,” said Reddy. “We have yet to see the surge in speculative IPO activity that typically signals an over-extended bull market.”

Healthcare recovery broadens

Opportunities are also emerging within managed care following a difficult period for US health insurers.

Operational recovery plans and a more accommodating rate environment could support a rebound in earnings, while elevated medical costs are increasing demand for technology that enables healthcare providers to operate more efficiently.

Taken together, Reddy believes these improving fundamentals strengthen the case for investors to reconsider a sector that has spent several years out of favour.

For portfolios increasingly dominated by technology exposure, healthcare could therefore provide both an alternative source of structural growth and valuable defensive diversification.