Despite concerns about a recession, investors can approach health-care investments with “cautious optimism” as the sector’s fundamentals remain fairly strong, a CIBC portfolio manager says.
“Heading into the rest of 2023, health-care equities, broadly speaking, are a relatively attractive place for global equity investors,” said Michal Marszal, portfolio manager and senior equity analyst, health care, at CIBC Asset Management.
Relative to historical valuations, the sector is not necessarily cheap, but it does have a “fairly strong fundamental outlook,” Marszal said. Performance in 2023 will be driven by the broader macroeconomic backdrop and global monetary policy.
A recession would likely only be felt by certain segments, he said, namely those confined to discretionary spending in health-care technology. Changes to interest rates, on the other hand, would affect broader health-care technologies like medical devices and research tools, as well as valuations within the biotechnology sector.
For this reason, Marszal recommends investors take a balanced approach.
The broader pharmaceutical sector, for example, is highly attractive because it is defensive and therefore insulated from potential headwinds. Sub-sectors that are more sensitive to interest rates, such as biotechnology, also present opportunities as rate hikes slow, Marszal said.
In this environment, he said the best-positioned companies have strong management teams, defensive-based assets, and underappreciated pipelines of late-stage clinical candidates. Those include Johnson & Johnson, Roche Holding AG, Novartis AG, and Sanofi S.A.
Within the biotechnology sector, Revance Therapeutics Inc., Keros Therapeutics and Mersana Therapeutics Inc. present opportunities but may be more vulnerable to market volatility, he said.
Within health-care technology, Marszal’s outlook for the device sector is cautious because of the macroeconomic risks. Sectors such as orthopedics, for example, should be avoided this year because such procedures are more discretionary, though certain discounted companies still present opportunities, he said.
Conversely, though still trading at elevated valuations, the research tools sector has solid fundamentals and companies such as ThermoFischer or Merck KGaA have “highly attractive growth opportunities.”
Specific segments within health-care research that have been discounted as a result of the broader selloff in the technology sector could also be attractive, he said.
For the health-care services segment, Marszal recommends high-quality stocks in defensive services that don’t exhibit much cyclical behaviour. Managed care is an attractive segment, he said, pointing to leaders like United Health or CVS.
This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.