Sector Bird’s Eye View: Health

by 27 Sep, 2019

What is it?

The healthcare sector is one of the largest sectors in a country’s economy, making up roughly 10-20 percent of most nations’ GDP (for the US, it represents 15.61%). It encompasses companies that provide medical services, produce medical equipment diagnostics or drugs, including biotech firms, and any other service relating to the provision of medical care to patients. 

Why is it important?

Healthcare is a crucial component of every nation’s economy. For example, healthcare makes up 15% of the S&P 500 index and 9.8% of the UK’s FTSE 100 index. The healthcare sector is fairly unique in that it is an evergreen industry with “inelastic demand.” What this means is that no matter what they charge, people are obliged to pay them in order to stay healthy. This allows healthcare companies to earn high margins on their products and services. Research shows that a 10% increase in life expectancy at birth can contribute 0.3-0.4% to economic growth per year. Countries with weaker healthcare sectors are less likely to achieve sustained growth and development, with healthcare epidemics causing significant drags on the economy. 

Popular Participants

  • Medical Equipment: Medtronic, Fresenius, Thermo Fisher
  • Drugs, Biotech: Johnson & Johnson, Pfizer, Merck, AbbVie, Roche
  • Healthcare: McKesson Corp, UnitedHealth Group, Cardinal Health 

Popular ETFs 

  • Vanguard Health Care
  • iShares Global Healthcare

When does it do well/badly?

The healthcare industry is known as a “defensive” industry, which means it does not suffer from cyclical downturns like most other industries, such as the technology sector. This is because of its inelastic demand. In times of uncertainty or when other companies are struggling, a defensive industry will remain stable or even do better in times of recession when illnesses are more common and people cut back spending on luxuries to focus on essentials. 

Why should I invest?

Healthcare stocks are relatively more stable than most other equities, making them a useful, low-risk addition to any portfolio where you rely on them for more stable baseline returns and get your excess returns from other more risky investments. In a broadly declining market, it is often a good idea to hold healthcare along with other defensive stocks, such as consumer staples, as they will outperform most other sectors in tough times. 

However, there are certain sub-sectors of healthcare, such as biotech, that operate in a less-stable environment (like genetic modification). As a result, they can produce above average returns if identified correctly. But with the possibility of higher reward comes higher risk, so be cautious when investing in the less stable parts of the healthcare industry. 

 

 

 

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