The healthcare sector has been a reliable safe haven during even the most challenging markets. But the novel coronavirus panic is raising questions about its resilience. By looking beyond the pandemic at changes sweeping the industry, investors can find defensive healthcare stocks that offer long-term growth prospects, too.
Healthcare stocks outperformed all sectors in the first quarter. In the MSCI World Index, the healthcare sector fell by 10.8%, while the benchmark dropped by 20.1% in local-currency terms (Display, left). With the worst-performing sectors such as financials and energy falling by 30.2% and 43.0%, respectively, healthcare stood out as a relatively solid sector for uncertain times. Our analysis shows that healthcare industries posted better relative performance versus the MSCI World during the recent downturn than in previous market crises (Display, right).
Conditions Deteriorating as COVID-19 Spreads
Despite its top relative performance, the healthcare industry is facing challenges. In particular, thousands of medical offices that aren’t directly serving virus-related needs have been shuttered, from general practitioners, family clinics and veterinarians to other medical outlets.
Large medical facilities and networks are hard hit, too. This is because they’ve deferred elective surgeries, chronic illness treatments, orthopedics and other services, which generate most of their revenues, to handle COVID-19 patients. Trauma-related surgeries have also fallen sharply, because fewer people are driving, riding bikes, playing sports or even walking outdoors due to stay-home orders around the world. We think hospitals may struggle for some time, even with massive stimulus coming their way, such as at least $100 billion in CARES Act money in the US.
Drug companies aren’t immune either. Answering the global call for virus treatments and a vaccine, big pharma has tapped the brakes on other medical research in their pipelines.
It’s a mixed bag, but all healthcare companies share one dire characteristic: none is even trying to guess what its forward earnings will be as far out as six months. Yet despite the cloudy outlook, we believe that any demand destruction from the crisis won’t be permanent for most companies in the healthcare sector.
Look Beyond the Science
In the short term, many healthcare companies are stepping up to answer the call for much-needed help. Those that specialize in testing, treatments and protective gear, for example, are accelerating production exponentially throughout the crisis.
The response is unprecedented. But what makes the healthcare sector a lasting proposition are the companies that are built to stand the test of time. That’s why it’s important to look beyond just the latest science and at the underlying fundamentals of the healthcare companies equipped for the long haul.
Pandemic Accelerates Changes
Like any sector, healthcare comprises many specialty areas, some of which may benefit directly from the forces of change. For example, technological innovations may revolutionize the doctor-patient relationship. With the coronavirus compelling patients to consult doctors remotely, we think the adoption of so-called telehealth will accelerate now and create a new normal for routine checkups and nonurgent medical consults via computer or mobile device.
Similarly, pharmaceutical companies are exploring virtual product marketing strategies, which will flip the old boots-on-the-ground contact model between sales reps and healthcare professionals. Ironically, healthcare has historically lagged in adopting new technology; it took a crisis to move it further along.
Hope for a Cure Today, but Invest for Tomorrow
Innovation has also raised hopes for a coronavirus vaccine or cure, given the scientific efforts taking place around the world. But it’s important not to invest in hopes for a blockbuster COVID-19 drug. Investing should be a long-term proposition, not a binary play for a sudden windfall, no matter how high the stakes. And investing in a company based on a belief that it might discover the vaccine is a low proposition bet, in our view.
To be sure, the company that finds the COVID-19 cure will be the big winner, although its overall marketing opportunity and profitability may be modest. But predicting scientific breakthroughs is not a prudent strategy for picking healthcare stocks. Solid underlying fundamentals, such as healthy balance sheets and durable competitive advantages, come first. If a solid company does find the cure, that’s an added benefit for investors and good news for the world.
Healthcare Offers a Balance of Defensive Benefits and Growth Potential
From a defensive perspective, the healthcare sector benefits from a steady stream of customers in need of its diverse products and services. At the same time, rapid innovation in healthcare is transforming everything from diagnostics and robotics to minimally invasive therapies and technology that will carry it well into the 21st century. We believe that this balance offers both resiliency and growth prospects, not just during a crisis but also along the road to recovery ahead.
- Vinay Thapar
- Portfolio Manager and Senior Research Analyst—US Growth Equities and International Healthcare Portfolio