Healthcare stocks are typically seen as defensive investments. When things go south for the market, they outperform.
That hasn’t played out this year, with tech once again dictating momentum and pacing gains. The sector is down about 1.5% year-to-date, a period that’s seen the S&P 500 climb nearly 11%. The tech-heavy Nasdaq 100 has fared even better, up 21%.
But despite their defensive traits, healthcare stocks are poised to play a bit of offense, according to two Wall Street firms. In notes to clients this month, both UBS and Franklin Templeton said the sector is set to stage a turnaround.
Detailed below is the reasoning behind each firm’s bullish outlook.
UBS
UBS listed three reasons they like the sector, starting with GLP-1 weight-loss drugs. The drugs are a huge growth driver for pharmaceutical stocks, which make up around one-third of the sector.
“GLP-1 drugs may be creating one of the largest new drug markets in pharmaceutical history,” Ulrike Hoffmann-Burchardi, the bank’s global head of equities, said in a June 8 note, adding: “What started as a treatment for type 2 diabetes has evolved into a global market, with the potential to exceed USD 100bn in revenues by 2030.”
Second, AI is helping healthcare firms discover new drugs faster. That’s a boon for investors because companies won’t have to spend as long developing the drugs, and will be able to spend less on the research, UBS said.
And third, the world’s population is aging, which will create “inelastic demand” for treatment going forward, the bank said.
Franklin Templeton
Franklin Templeton highlighted some similar reasons for upside potential, including AI as a driver for growth. The firm said companies are using the technology to become more operationally efficient, as well as for applications such as surgical robots and clinical trials.
Strong demand — both right now and down the line — was another reason Franklin Templeton likes the sector.
The stocks are also historically cheap, the firm said.
“Many investors have been putting money into technology stocks, especially those related to AI, instead of health care,” the firm wrote in a June 9 note. “As a result, health care stocks are now priced lower, even though the companies are still performing well. This could make them a good buying opportunity.”
The MSCI All-World Healthcare Index trades at a 12-month forward price-earnings ratio of 18.5 times, compared to 26.5 for the global tech sector.
Healthcare companies are also increasingly doing stock buybacks, which boost returns, Franklin Templeton said.
Examples of funds offering exposure to the healthcare stocks include the Vanguard Health Care ETF (VHT), the iShares Global Healthcare ETF (IXJ), and the Invesco Pharmaceuticals ETF (PJP).