With returns likely to be harder to come by in 2022, more defensive sectors such as healthcare are going to be crucial to investors’ portfolios according to Ian Jensen-Humphreys, portfolio manager at Quilter Investors.
What is exciting heading into 2022 isn’t necessarily the investments that could double or triple in value, but those that can be a great investment and add different characteristics to the portfolio.
Despite being thrust into the spotlight since the onset of the pandemic, healthcare remains one of those investments that can add significant value for an investor. There are a huge number of headwinds still to be resolved when it comes to inflation and central bank policy moves, and these have the potential to upset the apple cart.
This is where assets with more defensive characteristics can come into their own and add some ballast to a portfolio while also offering an attractive level of return. Something like healthcare is not just a trade for today’s environment either, but one that investors can benefit from over many years.
I see three reasons why healthcare has the potential to be a strong investment in 2022 as well as over the long-term.
Structural growth
There is a great story here for the sector as a result of aging populations and an emerging global middle class. When populations age in wealthy nations you get huge amounts spent on healthcare as a result and this trend is only going to get stronger over time as life expectancy increases and technology improves.
The growth of the middle class in Asia, in particular China and India, will also fuel a bout of healthcare spending. As wealth increases as does discretionary spending on healthcare products such as insurance, orthodontal treatment or dietary supplements.
Price pressures from government intervention is a risk but the status quo is fairly entrenched, so we don’t see this is a major threat to the sector’s growth over the medium and long-term. If anything, Covid has unearthed insecurity amongst nations on their healthcare supplies following shortages in protective equipment. As a result, government spending on healthcare is likely to increase in order to have confidence in their stockpiles and supply chains.
Defensive characteristics
Healthcare companies’ earnings are a lot more stable compared to other sectors. There is a constant base demand for healthcare products that you just don’t get in other cyclical industries and as a result earnings and share prices are more predictable.
The coming year is going to see volatility come back into the market as we look to combat the risks that are emerging. Healthcare companies tend to outperform in down markets and as such these sorts of characteristics are going to be vital to portfolios over the short-term to help protect capital when that volatility does come along.”
Valuations
Finally, healthcare companies are quite cheap at the moment. Usually because of their stable earnings these companies trade at a premium compared to the rest of the market. However, because Covid has resulted in many companies seeing their share price rocket, healthcare has been left behind and is trading at a cheap valuation relative to its history.
Given they are high quality and defensive, the valuation currently represents a good entry point for portfolios ahead of 2022 and beyond.
