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2021: An even better year for healthcare investments?

16 February 2021

After a pioneering 2020, healthcare could have an even better year in 2021, argues Sheena Berry, healthcare analyst at Quilter Cheviot.

Strong dividends, resolving issues around vaccine production and innovation in the face of political pressure could see the healthcare sector boom following an eventful 2020

Much of healthcare’s returns were driven by the pharmaceutical and biotechnology companies that have been at the forefront of the fight against Covid-19 and the ones likely to have the solution to combat the virus, as well as the sector as a whole being a defensive play from an investment standpoint.

However, it came under pressure in the run-up to the US Presidential Election and the threat of reform loomed from a Joe Biden administration.

However, we believe that much of the political risk has been diminished for now, and with a strong dividend culture and continuation of the innovation seen during the pandemic, there is a strong investment case for the sector even as defensive stocks go out of favour.

Once the vaccine manufacturing issues have been resolved, and depending on President Biden’s actions, the healthcare sector could have an even better year compared to last.

While healthcare is impacted by the political landscape in the US, the fact the Democrats control the Senate by the barest of margins would suggest we shouldn’t see too much interference as to have a significant impact on the sector. While Joe Biden would like to pick up where Barack Obama left off, it is unlikely we will see the sort of reform his Democrat predecessor was able to introduce with Obamacare.

We also believe much of the political pressure can be mitigated by innovation. By putting more focus on scientific advancement in terms of new therapeutic areas and digital health offerings, this can potentially help offset some of the political impact and produce better performances in capital markets.

One of the positives in the healthcare sector is the strong dividend culture that has been able to withstand the cuts and suspensions seen during 2020 from the rest of the market.

Pharmaceutical and biotechnology companies usually offer higher dividend yields within the sector compared to medical technology companies, and when compared to the wider market.

Payouts were not heavily impacted in 2020 compared to other sectors and this looks likely to continue in 2021, so for those income hungry investors should help keep demand for these firms high.

Any issues around the rollout of Covid-19 vaccines being ironed out, firms will be able to focus on meeting ambitious targets set by governments and responding to new variants of the disease.

An issue manufacturers are currently facing is trying to expand their capacity in order to supply the necessary doses to meet high demand – this sort of vaccination has never been done on this scale before. As a result, it was to be expected that they would be teething problems.

However, as the year progresses we expect to see many of these logistical problems get solved, allowing healthcare to do what it does best and innovate to ensure we end this crisis, either through further vaccine developments to fight new strains, or introduce new treatments against Covid-19.

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