The Case for Healthcare: Three Reasons That Matter
Valuations in the healthcare sector have dropped to historic lows – a rare opportunity for long-term investors. Bellevue Asset Management's healthcare team presents three compelling reasons why now may be the time to act.
1. Historic Undervaluation
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Healthcare stocks are valued at a discount of about 20 percent to the global equity market, a level last seen five years ago.
- Conclusion: This undervaluation presents a countercyclical buying opportunity, as today’s valuations do not accurately reflect the sector’s long-term earnings potential.
2. Sector Weighting at a Multi-Year Low
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The healthcare sector's weighting in the S&P 500 index is currently less than 10 percent – the lowest it has been in more than a decade. After reaching a similarly low weight in 2011, the sector bounced back and outperformed the broader market by more than 70 percentage points over the next four years.
And the healthcare sector remains a structural growth play that clearly benefits from demographic developments, innovation, and stable cash flows.
- Conclusion: Investor sentiment toward the sector is at a low point – strong rebound potential ahead.
3. Relative Weakness Versus Other Defensive Sectors
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Despite its intact fundamental strength, healthcare has underperformed the MSCI Defensive Sector Index by more than 10 percent since the summer of 2024.
Besides healthcare, this particular index also includes the defensive sectors of energy, utilities, and consumer staples.
- Conclusion: This divergence is also unusual in a historical context and may likewise lead to a countermove going forward.
Valuation-wise, the healthcare sector has reached a point that is very enticing for long-term investors. The facts speak for themselves, and investors would be wise to take a close look at the sector, whether for diversification purposes, to add stability to a portfolio, or as a calculated strategic move to capitalize on a structural growth story.
On the Verge of a Turnaround?
Several potential triggers could usher in a trend reversal for the sector as the year progresses.
• More Clarity on the Political Front Ahead
The current cloud of uncertainty hovering over the US healthcare industry is likely to fade in the wake of new policy announcements. This should provide more certainty during the coming months.
• Certain Policy Proposals Could be Watered Down
Last but not least, Washington's Most Favored Nation (MFN) policy and punitive tariffs are likely to be less draconian to secure congressional approval and facilitate the practical implementation of the new regime.
• Structural Strength and Innovation Power
The healthcare industry continues to stand out for its high, innovation-driven profitability, cost-efficiency potential, diversified revenue streams, and non-cyclical, stable demand.
• Relative Attractiveness in Connection with the US Tariff Deadline
Washington’s temporary suspension of its new tariffs for almost every country and industry will expire in July, and that could make healthcare stocks more attractive from a risk perspective, especially compared to cyclical stocks.
• Positive M&A Momentum
The environment for M&A has improved with the more business-friendly stance of federal antitrust agencies in the US and the expiry of high-profile blockbuster patents, which creates external growth opportunities for established companies with cash to spend.
