The health sector held up better than the global market due to the volatility of the stock exchanges. And, Morningstar analysts say, it should also do so with the slowdown in the economy.
In a situation of generalized decreases in world stock exchanges due to concerns about the Covid-19 pandemic, the healthcare sector and the tools dedicated to it are confirming a good resistance. The Morningstar Healthcare index in one month (up to March 31 and calculated in euros) lost 4.10%, bringing the performance since the beginning of the year to -9.9%. The global basket has marked -14.1% in the last four weeks (-20.4% since January and + 26.24% in 2019).
Morningstar Healthcare and Global markets indices compared since the beginning of the year
In this context, the funds dedicated to the Health sector, in a month, lost (on average and in euros) 6%, bringing the trend since the beginning of the year to -10% (+ 24% in 2019).
Healthcare to invest during the coronavirus crisis?
Will the sector be able to resist the worsening of the expected macroeconomic scenario? “Concerns about a global recession due to the Coronavirus pandemic are weighing on world markets, but the defensive nature of healthcare should be confirmed,” says Damien Conover, Sector director of Morningstar research.
The base scenario on which the analyst’s considerations are based speaks of a recovery in global GDP in 2021 which will follow a recession for this year. According to Morningstar estimates (as of March 31) for the global economic situation in 2020 there could be a 1.4% contraction which would lead to a recession in line with that seen during the period 2008-2009 (analysts, inter alia , warn that the forecasts may vary, even daily, depending on what the pandemic developments will be).
“However, if the Coronavirus pandemic were to have a prolonged impact on the global economy, with a high number of unemployed patients or with poor health or insurance coverage, then there could be a drop in healthcare-related demand,” says Conover. “In this case, however, we expect governments to support the sector. At least in the short term and until signs of effective treatment are seen”.
There are some critical issues that companies in the sector will have to deal with. “Because of the problems that arose with the Covid-19 emergency, for example, many pharmaceutical companies had to slow down the final phase of testing new medicines,” says the analyst. “The impact of Coronavirus on the credit market could also put the most indebted companies in difficulty. For example, those that have recently made major acquisitions”.
Healthcare is not biotech
Speaking of defensive sectors in a pandemic era, the healthcare sector must be considered separately from the biotechnology sector. The first embraces a composite universe that goes from health insurance companies to hospitals, passing from manufacturers of drugs to those of medical equipment, the second brings together small companies that are experimenting with potentially innovative treatments, but which are more vulnerable in case the funding runs out or if the tests do not go well.
“Theoretically, from a financial point of view, the biotech stocks to focus on would be those capable of developing innovative medicines to treat Coronavirus or to prevent it” says Karen Andersen, Morningstar’s healthcare strategist. “However, we must also deal with the uncertainties related to the timing with which these treatments will be tested and then approved. Not to mention that, while waiting for the green light from the authorities, the virus could regress making the new drug useless”.