The December sell-off was in part linked to a federal judge ruling the Affordable Care Act, ACA, in the US, to be unconstitutional, specifically its mandate requiring people to buy health insurance. This negatively impacted investors view of the sector, as the ACA created new customers for health care providers and expanded access to health insurance. The ACA has been challenged before and will likely continue to be, adding volatility to the sector.
Another defensive sector, utilities, was a close second through 2018 with the MSCI World Utilities index marking 2.0% as investors rotated into some of the more defensive sectors suggesting they were taking a more pessimistic view of the market and choosing to invest their money in those industries that are more likely to protect their capital.
Healthcare outperforms in 2018
The healthcare sector can be split into various sub-industries as per GICS classifications, pharmaceuticals, biotechnology and life sciences, and health care equipment and services.
Through 2018 it was equipment and services driving returns. The sub-industry makes up around 35 percent of the sector and names like United Health Group and Abbott Laboratories performed particularly well.
Healthcare equipment and services drive returns in 2018
Source: FE Analytics
Pharmaceuticals were middle of the pack as fears surrounding drug pricing continue, particularly with US elections in 2020, as candidates often promise to rein in health care costs.
Biotech is similar to the pharmaceutical sector as both produce medicine, but a biotech drug has a biological basis rather than a chemical one. Biotech tends to be a more volatile area of the market as companies can spend huge amounts of time and money developing a drug that may or may not work i.e. outcomes tends to be binary. It could fail at the final hurdle and have the US Food and Drug Administration (FDA) not approve it, or it could lose its patency. Depending on the outcome of a trial, a biotech company’s share price can either soar or crash, making it one of the riskier parts of the wider market. Due to these characteristics, biotech was the less favourable part of health care as investors looked for more defensive options within the sector.
Outperformance delivered in H2
The bulk of healthcare’s outperformance was achieved in the second half of the year, especially in the final quarter where investors piled into the more defensive parts of the market during the sell off i.e. utilities, health care, infrastructure and consumer staples, while the more sensitive and cyclical parts of the market, consumer discretionary, technology, financials, materials and energy suffered.
Healthcare is considered one of the ‘safe haven’ sectors to invest in due to its defensive characteristics, as regardless of the economic situation people will always spend money on their health, if they have to. The sector is supported by long-term demographic trends including an aging population in developed markets and the growing middle class in emerging markets who have more money to spend on their health. On top of this, according to Charles Schwab, healthcare companies’ strong balance sheets, attractive dividend yields and improving cost structures remain supportive of the sector.
We’ve seen the sector’s performance lag year-to-date with the MSCI World Health Care index reaching 8.5% while the more sensitive growthy technology sector has returned 18.5 percent at the time of writing and the MSCI World Energy index, 16.2% supported by the recovery in oil price. Meanwhile the benchmark MSCI World Index has returned, 12.6%, all in US dollars.
Tech outperforms and healthcare lags YTD