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From hospitals to medicine to insurance, most people have probably interacted with health care products and services at some point. While health care stocks receive plenty of coverage in financial publications Fisher Investments Canada reviews, the analysis is often oversimplified – the sector is broad, with varying characteristics across its many industries. Here Fisher Investments Canada reviews health care and how investors can benefit from exposure to it.
Health care is global equity markets’ third-largest sector by market capitalization, making up around 12 per cent of the MSCI World Index.1 It is a much, much smaller slice of Canadian stocks (less than 1 per cent of the S&P TSX Index).2 On a global scale, the sector is heavily concentrated in America – about 70 per cent of the MSCI World Health Care Index is in the U.S., with the remaining 30 per cent sprinkled mostly across Europe and Asia.3
The sector includes six industries, but pharmaceuticals – businesses that research, develop, produce and sell drugs – make up nearly half of it.4 Next biggest is health care equipment manufacturers, followed by health care providers and services, such as insurers, facilities and managed care, and biotechnology firms, which incorporate living organisms into medical products and services.5
Most financial publications Fisher Investments Canada reviews categorize health care as defensive, meaning it typically fares better than broader markets amid downturns. This is partially correct, as certain areas of the sector have shown this. For instance, American pharmaceuticals stocks outperformed broader U.S. stocks for the majority of the last three bear markets.6 This is because most spending on drugs is essential. No matter how the economy is performing, people need doctors’ treatment and medicine.
Other industries are less defensive, though. Consider health care technology firms, which provide online patient portals, radiology information delivery and cloud solutions for hospitals. The industry fell a whopping 63.6 per cent during the 2007–2009 global bear market, further than global stocks’ fall of 48.1 per cent and much more than broader health care’s fall of 30.1 per cent.7 It then massively outperformed during the long bull market that ran from March 2009 until 2020’s COVID-19 lockdowns, rising 868.7 per cent to global markets’ 350.6 per cent.8 This is because these areas typically flourish in a growing economy, when providers can afford to improve their technology or refurbish their equipment. When conditions get tough, businesses usually cut such nonessential expenses.
Health care also has sector-specific demand drivers, such as innovation and patenting trends. Fisher Investments Canada saw this in America in the mid to late 1990s, when U.S. Food and Drug Administration (FDA) approvals of new molecular entities (NMEs, typically new and innovative drugs) consistently exceeded their long-term yearly average.9 This wave of fresh patents and innovation contributed to health care’s outperformance during that period.10 But as NME approvals slowed in the early to mid-2000s, many patents from the 1990s’ innovation boom expired, corking the market for new medical products. This halted health care stocks’ outperformance in early 2006, and they lagged broader markets until mid-2008, when the global financial crisis buoyed the sector.11 Now, pipelines and patent dating aren’t perfect indicators, but they can hint at firms’ prospects.
Government policy is another driver and, based on Fisher Investments Canada’s reviews of history, investors should watch three factors in particular. First is government expenditures. Governments are the largest health care customers in developed economies, and their size allows them to dictate how much they will pay for products and services.12 Second is legislation and regulation and, since regulatory bodies vary by region, it makes sense to weigh them differently. For example, Health Canada and the European Medicines Agency (EMA) differ in jurisdiction and approval processes. Health Canada is centralized, with direct drug approval authority, while the EMA manages multiple countries and must submit recommendations to the European Commission.13
Hence, the EMA has a slightly longer average review and approval process for new drugs.14 But in most places, we find sweeping legislation can stir uncertainty for health care businesses, hurting stocks. In November 2007, the EU added regulations on advanced therapy medicinal products (ATMPs), requiring an intensive review process for such things as gene and cell therapy.15 The added complexity weighed on eurozone pharmaceuticals and biotech stocks, which underperformed their American counterparts for most of the next decade.16
Finally, taxes play a role, though a limited one in Fisher Investments Canada’s view, as businesses can navigate them with ease. For example, the U.S.’s 2010 Patient Protection and Affordable Care Act imposed new taxes and fees on many health care companies. President Barack Obama signed the bill on Mar. 23 of that year. Health Care stocks entered a temporary decline the next day, falling –13.7 per cent through July 1.17 Though U.S. stocks endured a correction (a sharp, sentiment-fuelled drop of 10 per cent to 20 per cent) within this period, their decline began a month later, and their rebound was stronger.18 From the date of the bill’s signing through that year’s end, health care returns were negative, while U.S. stocks were up.19
In Fisher Investments Canada’s review, understanding health care’s complexities can aid in portfolio decisions. Rather than viewing the entire sector as defensive, investors can weigh its industries based on their specific characteristics. For instance, if you anticipate an economic downturn, you might want to emphasize pharmaceuticals while reducing exposure to health care technology. It can also provide perspective amid the noise. Whether headlines say health care is set for a boom or doom ahead, investors can weigh this against the sector’s main drivers. Stocks move on the difference between expectations and reality, so a gap between what people say and reality can point to stocks’ likely direction.
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1 Source: FactSet, as of Sep. 30, 2024.
2 Ibid.
3 Ibid.
4 Ibid.
5 Ibid.
6 Source: FactSet, as of Sep. 30, 2024. Statement based on S&P 500 and S&P 500 Pharmaceuticals index total return in USD, Dec. 31, 1999 – Dec. 31, 2022. Pharmaceuticals outperformed cumulatively from Oct. 15, 2007 – Mar. 9, 2009, Feb. 19, 2020 – Mar. 23, 2020 and Jan. 3, 2022 – June 30, 2022. Presented in U.S. dollars. Currency fluctuations between the U.S. and Canadian dollars may result in higher or lower investment returns. We use U.S. stocks here to capture pharmaceutical industry-specific returns.
7 Ibid. MSCI World, World Health Care and World Health Care Technology index return with net dividends in CAD, Feb. 7, 2007 – Mar. 9, 2009.
8 Ibid. MSCI World and World Health Care Technology index return with net dividends in CAD, Mar. 9, 2009 – Feb. 12, 2020.
9 Source: FDA, as of Sep. 30, 2024.
10 Source: FactSet, as of Sep. 30, 2024. Statement based on MSCI World and World Health Care index return with net dividends in CAD, Dec. 31, 1994 – Dec. 31, 1999.
11 Ibid. MSCI World and World Health Care index return with net dividends in CAD, Dec. 31, 1999 – Dec. 31, 2009.
12 Source: Canadian Medical Association, U.S. Centers for Medicare & Medicaid Services, Office for National Statistics and European Commission, as of Oct. 14, 2024.
13 Source: Health Canada and EMA, as of Sep. 30, 2024.
14 Source: National Library of Medicine, as of Sep. 30, 2024.
15 Ibid.
16 Source: FactSet, as of Sep. 30, 2024. Statement based on MSCI EMU Pharmaceuticals, Biotechnology and Life Sciences return with net dividends and S&P 500 Pharmaceuticals, Biotechnology and Life Sciences Index total return in USD, Dec. 31, 2006 – Dec. 31, 2016. Currency fluctuations between the U.S. dollar, euro and Canadian dollar may result in higher or lower investment returns.
17 Source: FactSet, as of Sep. 30, 2024. S&P 500 Health Care index total return in USD, Mar. 23, 2010 – Jul. 1, 2010. Currency fluctuations between the U.S. and Canadian dollars may result in higher or lower investment returns.
18 Ibid. Statement based on S&P 500 Index and S&P 500 Health Care total return in USD, Apr. 23, 2010 – Dec. 31, 2010. Currency fluctuations between the U.S. and Canadian dollars may result in higher or lower investment returns.
19 Ibid. Statement based on S&P 500 Index and S&P 500 Health Care total return in USD, Mar. 23, 2010 – Dec. 31, 2010. Currency fluctuations between the U.S. and Canadian dollars may result in higher or lower investment returns.
Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates. This document constitutes the general views of Fisher Investments Canada and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments Canada will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.
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