23 March 2020
Looking after your health
After the latest unprecedented central bank action and promise of fiscal stimulus from many major economies, we hope the equity markets may find some support. For investors seeking relatively safe opportunities to enter the market, one consideration is health care. The sector has relatively outperformed on most days of the current crisis and has gathered inflows from investors (as seen in the charts below).
Amongst the headlines for this sector, the race to develop a vaccine for the coronavirus is the most eye-catching. Investing in the whole sector is one way of trying to capture the successful entity.
US regulatory fears reduced
The progress of the US Democratic primaries has lessened the risk of some of the toughest regulatory proposals from being enacted. US health care stocks jumped after former Vice President Joe Biden emerged as the Democratic Party frontrunner, suggesting that investors prefer Biden’s vision of expanding the Affordable Care Act to Bernie Sanders’ plan for universal health care (Medicare for All).
There are still threats from the current administration but these may also now be reduced. Trump’s administration has suggested multiple ideas aimed at reducing how much Medicare pays for drugs. This has stalled given fierce opposition by pharmaceutical companies and members of both political parties in Congress. Now, however, the need to mount a rapid response to the coronavirus threat gives the industry a powerful argument against price influence.
Emergency government spending may directly benefit health care services worldwide
There will be many headlines on spending to beat the coronavirus pandemic, but this will not benefit the sector universally. Industries within the sector have different drivers and economic sensitivities; the pie chart below shows the breakdown.
Many companies will be negatively impacted by the knock-on effects of the coronavirus, such as the cancellation of routine operations and delays to clinical and regulatory timelines and research spending. Disruption to the health care supply chain (already suffering shortages in sample tests, masks, gowns, etc.) and reduced availability of generic drugs, given heavy reliance on China for production of active pharmaceutical ingredients, are also problematic.
However, for health care technology companies, the pandemic could generate growth. Hospitals and distribution peers could benefit from rising admissions and shipment of supplies.
Two areas relating to COVID-19 are particularly interesting: the supply of COVID-19 testing kits and vaccine development for the virus. Companies involved in these areas could drive the health care sector, and the vast majority of them are quoted in the MSCI World Health Care Index.
Health care is defensive given the products supplied and services offered, which can be seen in relatively stable earnings growth. The sector has experienced relatively small downgrades to earnings forecasts so far this year compared with the rest of the market. Defensiveness can also be demonstrated by the low beta of share prices.
The sector is often seen as quality play with high returns and relatively low debt/equity. Most companies appear to have robust enough cash flow to continue to service dividends, which will not be the case across all sectors.
Supportive investor behaviour
The latest flows for sector ETFs show European-domiciled health care ETFs (representing funds tracking European, US and World health care indices) have been the second highest year to date versus all sectors. Meanwhile, data published by State Street Global Markets over the past week showed that institutional investors were relative net buyers of health care stocks in Europe, US and globally and they were coming from large underweight positions on average.
How to play this theme
There are three ETFs through which to play the health care theme. To read more about these ETFs, including their full performance histories, please follow the links below:
SPDR MSCI World Health Care UCITS ETF
SPDR S&P U.S. Health Care Select Sector UCITS ETF
SPDR MSCI Europe Health Care UCITS ETF