Is it time to reduce exposure to health care? Is it time to reduce exposure to health care? Is it time to reduce exposure to health care?

Is it time to reduce exposure to health care?

Equities 5 minutes to read
Peter Garnry

Chief Investment Strategist

Summary:  In today's equity update we take a deeper look at the health care sector as it has done very well in this low interest environment and recent economic slowdown. We show that the health care sector is not created equal during the contraction and recovery phase which means that investors should be rotating within the health care sector during the next business cycle phase transition. We also highlight the clear sign of a "Warren factor" that potentially has big impact on the sector as the US election approaches in 2020.

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.

Source: Bloomberg and Saxo Group

One thing is history and while it often rhymes it does not predict the future with any high accuracy. The upcoming US election in 2020 has the potential to be a significant factor for explaining health care returns. The chart below shows the relative performance between the S&P 500 Health Care Index and the S&P 500 Index since mid-April and the PredictIt’s probability of Elizabeth Warren becoming the Democratic presidential nominee. During the month of May when US equities lost 7% the health care sector outperformed the market delivering the promised downside hedge. At this point Elizabeth Warren was a distant possibility in the political race. As her momentum accelerated into early October the “Warren factor” became more and more dominant dragging down health care relative performance. Likewise, the reversal of her probability for being nominated has seen health care stocks surge relative to US equities in general. The key message is that Elizabeth Warren should be on the radar of investors with exposure to health care. It might be that Trump will surpass Warren on changing the health care system, but for now the Warren factor matters to health care stocks.

Source: Bloomberg and Saxo Group
Another factor to consider if one’s investment horizon spans multiple years is the valuation of health care stocks reaching its highest level since late 2001 and is now flirting with dot-com valuation levels. As we have talked about in multiple equity updates there seem to be a substitution effects from bonds into safe stocks with robust cash flows as rates decline. If US rates go even further from here, it’s plausible that health care sector valuation could reach the dot-com levels. But remember that valuation has a good historical track record of predicting future returns in the sense that the higher the valuation starting point of an investment the lower the future expected return is.
Source: Saxo Group

Quarterly Outlook 2024 Q2

2024: The wasted year

01 / 05

  • Macro: It’s all about elections and keeping status quo

    Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.

    Read article
  • FX: The rate cut race shifts into high gear

    As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.

    Read article
  • Equities: The AI and obesity rally is defying gravity

    Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.

    Read article
  • Fixed income: Keep calm, seize the moment

    With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.

    Read article
  • Commodities: Is the correction over?

    Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.

    Read article


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (
- Full disclaimer (

40 Bank Street, 26th floor
E14 5DA
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992