- The innovation pipeline for the health-care sector is full, especially in biotechnology, medical devices and the life sciences industries.
- Throughout numerous business cycles and periods of extreme market volatility, the sector’s “safe haven status often buoys its stocks through downturns or pullbacks” better than sectors that are more cyclical or discretionary. “Even through recessionary periods, most people will not forgo important health procedures or treatments. In the most recent past, the health care sector has also been able to outperform in up markets.”
Yoon sees two other advantages: One is the aging population. By 2030, “one in five Americans will be over age 65, compared to one in eight today.” The other advantage is the Affordable Care Act. The aging baby boomers will spend more on health care, and Obamacare will give “millions more” access to it.
“The biggest development in the health-care sector of late,” Goldsborough noted in his July 25 overview on the Affordable Care Act, “has been the opening of state-based health-care exchanges that allow individuals and small businesses to purchase standardized health insurance policies, receive government subsidies to offset premiums and cost sharing, and determine Medicaid eligibility.
“While U.S. health-care reform introduced new costs for several industries, Morningstar’s equity analysts believe that several health-care subsectors are poised to benefit from the exchanges.”
Yoon said his concerns about the sector were the “unknowns and challenges,” not the least of which “is investor uncertainty about cuts in government spending on health care.”
“For the most part,” he said, “I am staying away from investment in managed care organizations, hospitals and providers and from policy-centric investments in general.”
Goldsborough said Morningstar analysts see “two headwinds and one tailwind” in health care. The headwinds are the problems in Europe and the uncertain impact of sequestration. Even Medicare -- “once a sacred cow” -- may be at risk.
The “tailwind,” he explained, is the rebounding pharmaceutical industry.
“The valuations on Big Pharma stocks were very low in 2010 due to high concerns on the U.S. health-care reform and a wave of major patent losses,” he said in an e-mail. “However, the drug companies have adapted to both headwinds better than expected.”