Buying Health or Wealth?
In short:
- The current demand for healthcare accelerates the sector’s innovation that drives the stock prices up.
- The healthcare sector demonstrates its tremendous earnings growth as well as hold-up in the recessions.
- The fight against COVID-19 makes an investment in the healthcare sector promising.
Although major players in technology such as Google, Apple, Facebook, Microsoft and others comprise about 56% of the return in S&P index, the healthcare sector stock market cannot be underestimated in driving potential growth, especially in the race for innovation to make people healthier. Are there any real growth opportunities for investors in this stock market or is it just the play on people’s sentiments?
Healthcare is certainly an important and specific sector, no matter what is going on: wars, killing viruses, natural or industrial disasters. According to Deloitte's 2019 Global Health Care Outlook, the world’s healthcare spending is projected to increase by 5.4% annually in the span of the next 2 years. And there are some reasons for this trend. Firstly, according to demographic statistics, the world’s population is ageing dramatically. It is expected that the global population above 60 years will account for 22% of the total population by 2050, that is a 10% increase compared to 2015. Due to this fact, the demand for healthcare rises exponentially with age, since older people need more and more health goods and services to assure their well-being. Notwithstanding, it is worth mentioning that people’s lifestyles have been shaped. High obesity levels, man-made disasters and unknown viruses contributed to the development of other serious illnesses such as cancer, diabetes, AIDS, viruses and heart diseases. This drives innovation and advancement for their treatment to improve people’s lives globally. All in all, this generates demand for healthcare with the consequent contribution to innovation to ensure people’s well-being and productivity. Hence, there are long-term growth opportunities for investors in this industry that will produce excessive yields on its stocks.
What is it going on the stock exchange now? Admirably, albeit stock markets are greatly disrupted throughout the world due to the coronavirus crisis, the healthcare industry seems to be promising for investors. The healthcare stocks follow Finance and Technology in the S&P 500 Index. It is also noticeable that healthcare performs a 350% faster earnings growth compared to the whole S&P 1500 Index stocks. This sector is far less sensitive to swings in business cycles compared to other technology accelerating sectors, such as the sectors IT and communications. In periods of economic contractions, the healthcare earnings have the potential to plateau or rise alongside they face less volatility. For instance, while due to economic downturns the S&P 500 earnings shrank, the healthcare industry experienced earnings growth. The following graph of annual earnings per share in the entire S&P 500 and the Healthcare sector S&P 500 provides evidence that the healthcare sector earnings per share were increasing during times of recessions, such as the global financial crisis of 2008-2009 and the recession of 2016 in the US, while the whole S&P 500 Index earnings per share were experiencing a cyclical decline in the identical periods. The data predicts the same pattern for the current COVID-19 recession. However, due to the tremendous significance of the medical technology, infrastructure and pharmaceuticals in this crisis, the gap of earnings difference in the healthcare S&P 500 and the whole S&P 500 can be even larger than in the past crises.
Source: Bloomberg, L.P. as of July 27, 2020.
Investors cannot invest in an index. Past performance is not a guarantee of future results. Accessed via Nick Kalivas, as of August 26, 2020. Five reasons to consider investing in health care
It is worth mentioning the attractiveness of investing in the healthcare industry that lies in its great diversity and breadth, that contributes to the diversification of risk. Diversification of the industry stocks will have a positive effect on the healthcare investment: med techs, pharmaceuticals, biotechs, insurance, medical devices, robotics etc. Diversifying your investments with such a broad list of stocks will decrease the likeliness of losses in the uncertain time, along with stimulating returns and growth.
In light of the COVID-19 crisis, the importance of the healthcare sector is assured for brilliant investment opportunities. This is a new era in knowledge and technology which are critically needed to combat the virus. The pace of these changes will with high certainty to reflect on the share prices. Thus, this could be the moment to gain both your health and wealth in the future.
