AllianceBernstein is coming for your doctor; not with a scalpel in hand but with money.
The popular investment firm recently published an outlook for investing in the year ahead. After a volatile 2022, marked by heavy losses in both stocks and bonds, investors are looking for the right moves to make in the coming months. Tech companies, historically the darlings of the S&P 500, have laid off employees by the thousands. Relatively high interest rates will drag on the real estate market for the time being. And the bond market has begun making a comeback, but has always been a stronger option for income and safety investors than for those seeking growth.
Instead, AllianceBernstein has suggested that investors should consider medicine.
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“Healthcare stocks have remained in vogue through volatile markets, driven by increased interest in the sector during COVID-19,” the firm writes. “Yet the sources of the sector’s appeal run deeper than the pandemic’s effects and can provide resilient return potential through uncertain market conditions in 2023.”
As the firm notes, healthcare stocks grabbed attention during the worst of the coronavirus pandemic. In 2020 and 2021 the news was dominated by hospitals, healthcare staffing and medical technology. This brought the interest of general audiences and investors alike. During the early crash-and-recovery of 2020, for example, the S&P 500 recovered its losses by early August. The S&P 500 Health Index, on the other hand, had recovered almost all of its losses by mid-April. With the world first waiting on breakthrough medical technology, then excited about it, this made sense.
But, as AllianceBernstein points out, the pandemic is only one part of the story. Healthcare stocks overall tend to be less volatile and generally deliver well, either tracking or modestly outperforming the S&P 500 while usually avoiding the worst of the market’s dips.
“During a painful year for equity investors in 2022,” the firm writes, “healthcare stocks offered a pocket of relative stability. Global healthcare stocks ended the year down just 5.4% in local currency terms, outperforming the MSCI World Index, which tumbled by 18.1%. During the fourth quarter market rebound, healthcare stocks advanced more than 13%—also ahead of the global index.”
The S&P 500 mirrored the MSCI’s findings. The S&P 500 index as a whole lost approximately 19% of its value over the course of 2022, dropping from roughly 4,760 points at the beginning of the year to almost 3,840 by year’s end. Over that same period, the S&P 500 Health Care Index lost 3% of its value. It opened 2022 trading at 1,643 points and closed the year at 1,585.
In a year of losses healthcare investors emerged, if not unscathed, then almost right back where they started.
Much of the reason has to do with the nature of healthcare spending.
Most industries sell a product that is, to some degree or another, discretionary. Even necessities compete against a very broad market. Most people have an enormous range of choices when it comes to their food, clothes, residence and so on. Healthcare works differently. There isn’t much negotiating with the human body. When you need your appendix out, there’s no deciding that you’d really prefer to just take some ibuprofen or go for a run. Medical care is, in most cases, either a strong recommendation or an outright necessity.
Just as importantly, that trend increases as people get older. Young and healthy people tend to need relatively little medical treatment, although they tend to have more urgent healthcare needs. (At 25 you can treat most things with a handful of Advil, but still need to see the doctor for a broken arm.) As populations age, they need more care and they need that treatment more frequently. Since a growing society means an ever-larger aging population, that creates a demographic opportunity for the industry.
For investors, this means two things. First, healthcare spending tends to have a floor. Patients will always need a certain amount of care and treatments. Second, that floor will continue to grow as the higher-needs segment of the population gets larger.
“[D]emand for healthcare tends to transcend cyclical turns in the economy… because the core driver of healthcare growth is people,” the AllianceBernstein report finds. “Global demographics support healthcare growth in different ways. In developed markets, an aging population will require more treatments. In emerging markets, faster population growth is fuelling [sic] demand for healthcare products and services as societies become wealthier and the middle class grows. These demographic trends will persist no matter what happens in the wider economy.”
Now, there’s a corollary to all of this for investors.
The same boundaries that provide support to healthcare as an investment industry also provide resistance to it. On the low end, patients need to get treated for their illness and injuries, with a certain amount of discretion about when some treatments are necessary. But on the high end, patients also don’t need more medical care than that. There, too, they have a certain amount of discretion over some quality of life treatments, but ultimately there’s a ceiling on how much medical care a population can and will consume. While good advertising can convince someone to grab potato chips even if they’re not particularly hungry, it’s the rare billboard that can convince drivers to pull over for an impulse colonoscopy.
This is the downside to the sector’s stability. Healthcare stocks are generally growth stocks, meaning that they’re likely to outperform the market steadily but are rarely undervalued gems.
In some cases, investors can pursue big gains by investing in medical technology companies and pharmaceuticals. As with all areas of technology, a big product launch can generate huge returns for investors. But also, as with all areas of technology, this strategy loses the stability at the core of healthcare’s appeal. These companies, like all innovators, are taking big risks in the hope of big returns. This makes new technology investing a form of potentially lucrative speculation.
For healthcare overall, as an industry, investors should expect steady gains defined by a market with both upper and lower boundaries of consumption. While that may not necessarily be the right move during a hot market with great opportunities, it might be the perfect option for a down market filled with volatility.
During a volatile market, and after a year of heavy losses, investment firm AllianceBernstein is looking at healthcare as a great investment.
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