Is it time to reduce exposure to health care?

Everyday is a new high in global equities as central banks easing and hopes of a US-China trade deal have created a very strong narrative that nobody wants to sell short. But the strong momentum rally sets the equity market up for a potential powerful decline should reality turn out to be that of an even weaker economy with signs of spill over effects into the broader labour market. The next two months are crucial in the assessment of the “soft patch” scenario that equities are basing their price action on.

The global economy according to OECD’s global leading indicators (CLI) the economy is growing below trend growth and slowing down which is what we define as the contraction phase. Historically this phase is not good for equities vs bonds and we also observe across most industries that they underperform relative to the risk-free rate. One of the industries that tend do reasonably well on a relative basis is the Pharmaceuticals, Biotech & Life Sciences industry. Given the rising macro uncertainty we have a lot of clients asking for our view on the general health care sector so in today’s equity update we will provide our view on the sector.

As our business cycle map shows the health care sector consists of two industries; 1) Healthcare Equipment & Services and 2) Pharmaceuticals, Biotech & Life Sciences. They are both defined as defensive industries as they exhibit lower volatility than the general market and provide excellent risk-adjusted returns during the critical Slowdown phase. According to our business cycle map the Pharmaceuticals, Biotech & Life Sciences sector is worth having exposure to in the current business cycle phase but investors have to be prepared to reduce exposure when the economy swings into the Recovery phase where other industries such as Semiconductors, Real Estate and Consumer Durables & Apparel are more high beta plays. One key observation is that the Healthcare Equipment & Services industry tends to do well in the Recovery phase so investors should do a rotation within the health care sector during the phase transition.