Are Healthcare Stocks Still Defensive in the Current Environment?

After a difficult first half, healthcare’s defensive capabilities are coming into question, but it outperformed the broader markets on a relative basis. The MSCI World Healthcare Index fell by 10.3% through June 30, 2022, in US dollar terms, compared to a 20.5% decline for the MSCI World Index, extending its steady pattern of downside risk reduction. In fact, healthcare has outperformed the market in every year global equities have lost ground since 2000 (Display).

Today’s Healthcare Sector Combines Defensive with Opportunistic

Healthcare’s defensive ability hasn’t changed, but the nature of the companies that comprise the sector have. For example, pharmaceuticals made up 82% of the benchmark in 2000. By the end of 2021, however, that share was just 38%. The weighting of biotechnology and equipment & supplies, meanwhile, nearly tripled (Display). Healthcare’s evolution has substantially changed the way market forces can impact the sector’s short-term performance, but it has also grown the opportunity set for active investors.

For instance, recent market declines are being driven by sharp sell-offs in growth stocks. Small-cap biotech companies—now a major component of the healthcare benchmark—have been caught in the downdraft. That’s why it’s important to distinguish among individual companies in biotech, or within all healthcare segments for that matter. The goal is to separate those that have the strength to weather the storm from those that might not.