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Although political uncertainty continues to surround the healthcare industry, there is much to consider about the long-term prospects for the sector as an investment. Over the past decade many investors have flocked to healthcare stocks as a refuge (especially after the financial crisis), a potential source of income and as a potential area of high growth. Yet valuations still look reasonable. Because healthcare has higher dispersion and lower stock correlation than other sectors, investors may want to selectively consider different subsectors based on long-term demand, waning regulatory pressures and industry growth potential.
Sources: BlackRock Investment Institute, MSCI, Institutional Brokers' Estimate System and Thomson Reuters, March 2017.
Notes. The dots show the current premium or discount of selected care sedors to the MSCI All-Country World Index, based on forward pnce-to-eamings estimates. The bars show the range between the 25th and 75th percentiles since 1996. A reading greater than one indicates a premium to the broader market; less than one reflects a discount. Services include distributors, service providers and facilities. Past performance does not guarantee future results. This information should not be relied upon as investment advice for any particular fund or security.
The need to care for aging populations means healthcare may be a growth business. As costs rise, healthcare spending totaled more than 16% of GDP in 2015, up from single digits in the 1970s and about 12% in 1995, according to OECD.
Despite negative political sentiment, we believe any impending systemic changes to U.S. drug pricing policy is unlikely – a potentially positive scenario for biotech and pharma companies with strong growth pipelines – impacting the long term demand for healthcare.
We see M&A activity acting as a catalyst for industry consolidation although many big drug makers are struggling to maintain past rates of growth.
What happens if few deals get done? Companies might return more cash to shareholders in the form of dividends or share buybacks, which could create opportunities for income-oriented investors.
We see long-term demand for healthcare products and services rising despite the changing political landscape. Worries about drug pricing and other policy risks are largely reflected in valuations, in our view. We see potential opportunities in biotech, big pharma with promising drug pipelines and the managed care sector, which includes some insurance providers that may benefit from potential deregulation and efforts to curb overall healthcare costs.