In a year filled with uncertainty and aspirations for economic normalization, global equity markets climbed higher, building on the recovery that we saw in the second half of 2020. Global healthcare equities kept pace in this environment, turning in solid absolute returns. The rollout of COVID-19 vaccines, diagnostics, and progress on effective therapeutics enabled a gradual lifting of restrictions in many regions. These developments, coupled with supportive fiscal and monetary policies, fueled a surge in corporate earnings and economic growth.
However, the path to economic normalization remains fluid as the emergence of the Omicron variant has triggered renewed volatility and concerns that the recovery could be derailed. Scientists, healthcare executives, and government organizations worldwide continue to devote significant time and resources to transitioning the current pandemic to a more manageable seasonal endemic virus. The development of timely booster shots that may protect against emerging variants, coupled with the broad availability of diagnostics, will be key tools as we move forward. That said, we cannot simply vaccinate and test our way out of this pandemic. Ultimately, we’ll likely need effective antiviral treatments in order to shift to an endemic environment and further the progress toward economic normalization.
While working on COVID-19-related advancements remains a high priority for the world’s leading healthcare companies, they continue to be committed to addressing equally pressing clinical challenges with profound health implications. Pursuing treatments and cures for other unmet medical needs remain a core focus of the industry. These include cancer, metabolic syndrome, rare/orphan diseases, and central nervous system disorders.
Indeed, the ability of healthcare companies to address such unmet medical needs is one of the three guiding principles by which we allocate capital and should help inform the sector’s impressive long-term growth prospects moving forward.¹
Investment growth for every US$100,000, from December 31, 1994, to December 31, 2021
Global healthcare equities have outperformed the broader market by roughly 3% (annualized) since 1995—a difference that really adds up
Growth underpinned by multiple secular drivers
Healthcare is unique in that it’s a defensive sector that can produce impressive organic growth. This is supported by earnings per share and sales growth that have, on average, been historically superior to the broader market.2
This strong growth has been fueled by long-term secular trends that we believe will propel demand for healthcare products and services higher over the longer term, regardless of the global economic cycle.
- The aging population should continue to drive increases in expenditures
Notwithstanding a short-term contraction driven by the pandemic, the world’s population continues to age, and life expectancy is forecast to climb over the long term. This should translate into greater demand for healthcare-related services, rising expenditure, and an expanding array of treatments and therapeutic options.
- Medical advancements
As evidenced by the progress seen with COVID-19 treatments, diagnostic tests, vaccines, and medical advances continue to drive the sector forward.
- Profound unmet medical needs remain
As previously mentioned, healthcare companies continue to pursue unmet medical needs beyond COVID-19. These include, but are not limited to, solid tumor cancers, type 2 diabetes, obesity, Parkinson’s disease, and Alzheimer’s disease.
Attractive valuation levels
Healthcare equities remain relatively attractive on a forward price-to-earnings (P/E) basis versus the broader market indexes. This presents a unique opportunity, as healthcare companies have historically traded at a premium to the overall market due to their defensive nature and aforementioned growth prospects. Global healthcare companies are currently trading at a discount to the overall market (16.83 times versus 18.02 times).
Valuation Metrics (P/E)
Long-term Average3(2005–January 2022)
As of January 31, 2022
MSCI World Healthcare Index relative to MSCI World Index
Source: FactSet, as of January 31, 2022.
Recent findings related to the COVID-19 pandemic and the emergence of the Omicron variant
A new COVID-19 variant, the Omicron variant, was identified in late November 2021. It’s believed to have originated in Botswana, Africa, with its emergent spread identified through genomic sequencing in Pretoria, South Africa. The World Health Organization deemed it to be a variant of concern due to the exponential expansion of around 58 seemingly critical point mutations in the various domains of the virus, including spike protein, receptor binding domain, and cleavage sites. These mutations are believed to confer substantive changes to the transmissibility, virulence, and immune escape (from both vaccines as well as previous infection).
Early data from South Africa suggested heightened transmission relative to the earlier Beta and Delta waves. This data has now been confirmed in much of Asia, Europe, and North America.
Although the Omicron variant seems to be highly transmissible, early indications suggest that it results in milder symptoms relative to previous variants, with the contention that those infected experience less severe disease, on average, than previous variants. Generally speaking, this reduced virulence results in lower intensive care unit hospitalization and mortality rates.
Regarding the variant’s ability to escape immunity, early data out of South Africa, as well as more recent data in Asia, the United States, and Europe, suggest that the Omicron variant does broadly escape our current vaccines’ ability to prevent transmission. Data also suggests that the Omicron variant is associated with a substantial ability to evade immunity from prior infection.
How we expect the COVID-19 pandemic to evolve in the coming years: a persistent COVID environment
Over the past two years, our fundamental research process has enabled us to interact with many of the world’s leading clinicians, immunologists, epidemiologists, and public health officials working in real time to research the emerging science and clinical implications of the current pandemic. With appropriate humility, neither we nor these researchers have a perfect crystal ball to help us see the eventual outcome of the current pandemic.
That said, our research suggests that SARS CoV-2 (a member of a large family of viruses called coronaviruses) may well become a persistent respiratory virus afflicting broad swathes of the world for years to come. Hopefully, it may eventually evolve and become comparable with other predecessors (i.e., influenza or the respiratory syncytial virus, respiratory syncytial virus, etc.) as it moves to a seasonal endemic virus.
However, its unusual combination of high mutagenicity and transmissibility, as well as its relatively high morbidity/mortality rate, suggest that it’ll continue to disrupt various aspects of our healthcare systems and the broader economy, fluctuating in various geographies over the foreseeable future.
Implications for investment positioning
Relying on rigorous fundamental research to sift through vast swathes of scientific data is critical when allocating capital in this sector. A bottom-up, fundamental investment process that’s informed by a thoughtful assessment of emerging scientific and medical developments, coupled with a disciplined intrinsic valuation framework, has the potential to uncover robust opportunities at fair valuations.
This approach continues to inform how we construct a portfolio. To this end, our findings on the SARS CoV-2 pandemic have led us to reallocate capital toward specific companies and subsectors that we believe will generate above-market revenues and profits in a persistent COVID environment. Concurrently, we’ve allocated capital away from certain names and subsectors that could be more adversely affected in this environment.
First, we advocate for an overweight exposure to various biopharmaceutical companies with market-leading COVID-19 therapeutics and vaccines. This is consistent with our thesis that the pandemic/endemic may persist for several more quarters, if not years. In our view, these companies are expected to see consistently robust demand for their COVID-19 treatments and vaccines well above street estimates. In addition, we believe this is an area of the healthcare sector that offers reasonable valuations with the potential for further price appreciation.
Second, the ongoing COVID-19 pandemic heightens the urgency to effectively manage preexisting disease states (e.g., cancer, metabolic syndrome, asthma, and other immunologic disorders) that, according to our research, predisposes patients to higher morbidity and mortality from COVID-19. Accordingly, we’ve adjusted our positions in select therapeutic names to reflect these findings.
Third, select established leaders in the COVID-19 diagnostics space offer a unique investment opportunity, as we believe the market is currently underappreciating these businesses' durability. For the world to remain open in a persistent COVID environment (schools, small businesses, office environment, public events, etc.), on-demand and repeated testing will be required. We believe this significant demand for COVID-19 diagnostic testing will be needed for far longer than the market estimates. As such, our proprietary cash flow models are estimating future revenues that are well above sell-side estimates.
Finally, and as previously noted, we’ve allocated capital away from select biopharmaceutical, healthcare services, and medical device companies overindexed to various disease states and product markets that have been disproportionately adversely affected by the persistent COVID-19 environment. These would include various companies with exposure to orthopedic surgery, hospital services, and select oncology conditions.
Secular trends warrant a long-term allocation to healthcare companies
We maintain our belief that new modalities in treatment and prevention will continue to drive long-term governmental outlays toward healthcare products and services. Irrespective of incremental tailwinds and headwinds associated with COVID-19, the underlying secular trends of aging demographics, medical advancements, and profound unmet medical needs support long-term exposure to global healthcare companies in a well-balanced investment strategy.
We believe that select companies within the healthcare space offer the potential for strong long-term outperformance and view this as an opportune time to invest in the sector, with a focus on the importance of stock selection as a primary driver of outperformance.
1 FactSet, as of January 2022. 2 FactSet, from 2005 to 2022. 3 FactSet, from 2005 to 2022.
A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other pre-existing political, social and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.
Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.
The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.
This material is intended for the exclusive use of recipients in jurisdictions who are allowed to receive the material under their applicable law. The opinions expressed are those of the author(s) and are subject to change without notice. Our investment teams may hold different views and make different investment decisions. These opinions may not necessarily reflect the views of Manulife Investment Management or its affiliates. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.
Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment strategy, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management. Past performance does not guarantee future results.
Manulife Investment Management
Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. We draw on more than a century of financial stewardship to partner with clients across our institutional, retail, and retirement businesses globally. Our specialist approach to money management includes the highly differentiated strategies of our fixed-income, specialized equity, multi-asset solutions, and private markets teams—along with access to specialized, unaffiliated asset managers from around the world through our multimanager model.
This material has not been reviewed by, is not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions. Additional information about Manulife Investment Management may be found at manulifeim.com/institutional
Australia: Hancock Natural Resource Group Australasia Pty Limited., Manulife Investment Management (Hong Kong) Limited. Brazil: Hancock Asset Management Brasil Ltda. Canada: Manulife Investment Management Limited, Manulife Investment Management Distributors Inc., Manulife Investment Management (North America) Limited, Manulife Investment Management Private Markets (Canada) Corp. China: Manulife Overseas Investment Fund Management (Shanghai) Limited Company. European Economic Area Manulife Investment Management (Ireland) Ltd. which is authorised and regulated by the Central Bank of Ireland Hong Kong: Manulife Investment Management (Hong Kong) Limited. Indonesia: PT Manulife Aset Manajemen Indonesia. Japan: Manulife Investment Management (Japan) Limited. Malaysia: Manulife Investment Management (M) Berhad 200801033087 (834424-U) Philippines: Manulife Investment Management and Trust Corporation. Singapore: Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration No. 200709952G) South Korea: Manulife Investment Management (Hong Kong) Limited. Switzerland: Manulife IM (Switzerland) LLC. Taiwan: Manulife Investment Management (Taiwan) Co. Ltd. United Kingdom: Manulife Investment Management (Europe) Ltd. which is authorised and regulated by the Financial Conduct Authority United States: John Hancock Investment Management LLC, Manulife Investment Management (US) LLC, Manulife Investment Management Private Markets (US) LLC and Hancock Natural Resource Group, Inc. Vietnam: Manulife Investment Fund Management (Vietnam) Company Limited.
Manulife, Manulife Investment Management, Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.