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Wealth Insights

US Health Care: Navigating the Sector’s Political Risk

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Three factors explain the underperformance of health care stocks year-to-date: 1) Profit-taking after having been the best performing sector in 2018; 2) Defensive health care names were set up for underperformance amid the cyclical recovery since late December; 3) Growing worries over a major shakeup of the health care system in the run-up to next year’s US Presidential elections.

 

This episode is not the first time politics have shaken health care investors’ resolve. Citi analysts identify similar episodes in the last decade when health care stocks initially sold off amid the threat of disruption, only to recover as the status quo held firm. Canada, which passed and implemented universal insurance coverage in the mid-1980s, provides a useful illustration that segments of the health care industry can remain investable despite an increased government role.

 

 

Citi analysts favor health care due to its intersection with two unstoppable trends: Aging Population (in the US and globally) and EM Consumer growth. In Citi’s view, both of these trends could drive a secular increase in health care spending globally in the coming decades. As a result, health care firms that make products, drugs, and equipment for a global environment could outperform

 

For investors able to diversify their health care exposure geographically, Citi analysts continue to believe that it makes sense to ‘go global’. Not only is the global health care sector’s beta to the S&P 500 lower than that of the US health care sector, but dividend yields among European health care names are significantly higher than elsewhere.

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