Key points
- Amid a more uncertain market environment, we believe health care is one of the few sectors that offer defensive attributes as well as attractive growth opportunities.
- Socioeconomic trends and the coronavirus pandemic are driving significant spending in health care—underpinning a potentially exciting period of innovation, consolidation, and optimisation.
- The multifaceted, complex, and innovative nature of health care makes it a rich landscape for differentiated insights and fundamental, bottom-up stock selection.
Following a challenging year in 2022, during which both equity and fixed income markets delivered negative returns, financial markets have, so far, rebounded confidently in 2023. However, many of the root causes of recent uncertainty have not gone away, as inflationary pressure, elevated interest rates, mixed macroeconomic signals, and geopolitical concerns all persist. These risks create a more uncertain environment and make appealing growth opportunities harder to find. Given this market backdrop, there are few sectors that offer both important defensive characteristics and also the opportunity to achieve target investment growth thresholds. We believe health care is one such sector.
Health Care Is a Rare Investment Dichotomy
Health care has historically displayed relative resilience during periods of market uncertainty. This is due to the general inelasticity of demand for many health care products and services. Whatever might be happening in the wider economy, in good times and in bad, people still get sick, ensuring constant demand for hospital care, medical insurance, consumable products, and treatments for chronic conditions. This resilience was again displayed in what was a difficult 2022 market environment, in which the health care sector outperformed the broader S&P 500 Index by 15.8%.1
The US Is a World Outlier in Terms of Health Care Spending
(Fig. 1) Percentage of national GDP spent on health care
As of June 2023 (latest data available to December 31, 2021). Current expenditure on all health care functions, as a share of national gross domestic product (GDP). Source: OECD Health Statistics.
At the same time, health care continues to offer attractive growth potential in the form of game‑changing advancement in drug therapies and medical devices. The most attractive companies in these fields not only command strong pricing power due to the innovative nature of their products, but patents and regulatory approvals also create clear barriers to entry.
1S&P Health Care Sector (Total Return) Index vs. S&P 500 (Total Return) Index, period January 1, 2022, to December 31, 2022.
This post was funded by T. Rowe Price
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