Analysis-US healthcare stocks roiled by investor tug of war over economy

Reuters | September 5, 2023

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By David Randall

NEW YORK (Reuters) – U.S. stock fund flows into and out of the healthcare sector have swung wildly from week to week lately, as investors have adjusted their bets over how long the economy will stay strong.

Many view healthcare as a defensive sector because it has constant demand and is somewhat insulated from the economy. Down nearly 2% for the year to date, healthcare has badly lagged the gain of over 17% in the S&P 500 index as U.S. economic growth has heated up to what the Atlanta Federal Reserve estimates is a booming 5.9% expansion in the third quarter.

In the latest week, investors pulled a net $1.4 billion from the sector, the biggest weekly outflow since May 2022. That was only a little more than the net inflow of $1.3 billion to healthcare stocks in the week of Aug. 14, the second-largest weekly gain since 2008, according to BofA Global Research.

Overall, the healthcare sector – which ranges from health insurers like UnitedHealth to pharmaceutical companies like Pfizer to small biotechs – has received the third largest inflows of any sector year to date, BofA’s data showed. Still, the sector [.SPXHC] is down around 2% year-to-date, one of few areas that have not joined the broad market rally, adding to its appeal among bargain hunters.

“If you continue to see money flowing into healthcare then investors are using their feet to march to a more conservative posture given the uncertain outlook for where the economy goes from here,” said Bob Kalman, senior portfolio manager at Miramar Capital.

While U.S. growth has largely been robust this year, some investors who are bullish healthcare stocks believe that the Federal Reserve’s interest rate hikes will eventually start to weigh on the economy.

Healthcare “offers some defense in a period where the lagged impact of Fed tightening is likely to cause economic growth to contract,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management, who is bullish on the sector.

One potential sign of economic weakness came last Tuesday, when U.S. data showed job openings dropped to the lowest level in nearly 2-1/2 years in July as the labor market gradually slowed.

Less pessimistic investors noted that the economy has been resilient thus far and shows few signs of cracking. This would weaken the case for loading up on healthcare stocks.

The Atlanta Federal Reserve’s GDPNow forecast model showed the economy was likely growing at a 5.6% annualized rate in the third quarter, though analysts said they expect the estimate to drop as more data comes in.

Dan Lyons, a portfolio manager at Janus Henderson Investors, said the Fed’s rate increases will begin to weigh on the economy this fall, making earnings growth estimates for the broad market appear too rosy. He has been buying biotech stocks, expecting them to hold up while other areas of the market wobble.

“The sector is set up to do well in any environment but when you’ve got slowing growth investors tend to look for companies that can provide innovation,” said Lyons.

Others have been more hesitant, even if they already hold some healthcare names in their portfolios.

Kalman, at Miramar Capital, believes it is early to add to his healthcare allocation, citing possible political and regulatory risks for the sector.

Last week, President Joe Biden’s administration released its list of 10 prescription medicines subject to the first-ever price negotiations by the U.S. Medicare health program as part of the Infastructure Reduction Act. Big-selling blood thinner Eliquis from Bristol Myers Squibb and Pfizer are among them, but analysts said factors such as upcoming patent expiration may dull the impact to earnings.

Overall, healthcare sector earnings are expected to lag this year as COVID-related revenues decline 13% versus a 1.8% rise for the overall S&P 500. For 2024, earnings in the sector are expected to rise 12.8%, slightly better than the 11.8% increase seen for the S&P 500, thanks in part to increased demand for products such as obesity drugs, according to LSEG data.

Margie Patel, a senior portfolio manager at Allspring Global Investments, holds positions in healthcare companies including Danaher and Thermo Fisher Scientific but expects those stocks to lag as the resilient economy continues to favor industrials – a sector that is up about 10% year-to-date.

Healthcare stocks are likely to remain in a slump until the unemployment rate rises, signaling that the labor market has cooled and sending investors into more defensive sectors, Patel said.

“Only if you had a lot of confidence that we will have a recession would you put money into healthcare now,” she said.


(Reporting by David Randall; Editing by Ira Iosebashvili, Megan Davies, David Gregorio and Richard Chang)


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