By Harvest ETFs
The fundamental and long-term outlook for the healthcare sector is strong. That was the core message delivered by Harvest ETFs CIO Paul MacDonald to a group of Canadian financial advisors in January.
At the webinar, titled “A New Year in Healthcare” MacDonald emphasized that despite a new year, new COVID variants, and a choppy few weeks on the markets, the long-term prospects for the healthcare sector remain positive. He outlined major macro themes in the sector, explained what short-term catalysts could impact the Harvest Healthcare Leaders Income ETF (HHL:TSX), and detailed how the ETF is positioned for investors.
“There has not been any change to our long-term drivers for healthcare,” MacDonald said at the Webinar. “People are getting older all around the world, developing markets spend a disproportionate amount of their increasing wealth on healthcare needs, and technological innovation is ramping up at a rapid rate.”
Speaking about aging populations, MacDonald highlighted the number of people crossing 60 around the world. Over that demographic threshold, he explained, healthcare expenditures per capita almost double. Aging populations are a significant dynamic in the developed world and MacDonald highlighted that very few sectors outside of healthcare are positively exposed to this trend.
While older developed populations’ healthcare spending rises, so too does healthcare spending in the developing world. Growth in healthcare spending in emerging markets, MacDonald explained, grows at a rate disproportionately higher than the rate of economic growth. People in countries like India and China are growing steadily richer and are now spending significantly more on healthcare.
As healthcare companies meet this growing global demand, they are innovating almost constantly. MacDonald emphasized some of the life-changing innovations that companies in the HHL portfolio have pioneered. Abbott Labs, for example, have developed a continuous glucose monitoring technology diabetes patients can access on their phones call FreeStyle Libre. That tech platform is now being built out to help patients with other chronic conditions, opening up a universe of overlap between healthcare and consumer electronics. Lives are being changed and new opportunities created in the process.
MacDonald also highlighted some shorter-term trends in the sector. The first is that healthcare has steadily improved its valuations overall. The healthcare sector was underperforming going into the 2020 election, but a shift in the political spotlight away from healthcare has allowed it to grow. While healthcare remains a political issue in the United States, mainstream politics and policy don’t look set to negatively impact the sector. Conversely, major policy proposals like Build Back Better could be positive for healthcare. At the same time, more investors have gained positive views of the space, especially in drug manufacturing as big Pharma companies drove some of our best new tools to combat COVID-19. That has all been positive for healthcare valuations this year.
Even as the Omicron variant becomes a point of serious focus, MacDonald emphasized that the healthcare sector is already moving beyond a COVID pandemic. He sees the approval of Pfizer’s oral COVID treatment Paxlovid as a watershed moment that will go a long way in keeping any future outbreaks from overwhelming healthcare systems.
With the outlook that pandemic COVID may be ending soon, MacDonald explored how some of the vaccine winners will use the financial windfalls from vaccines and treatments to build a stronger platform for their post-pandemic future. He highlighted the example of Pfizer, the biggest winner of the vaccine makers and HHL’s largest exposure to COVID-19 vaccines and treatments. He explained how Pfizer is expected to take in more revenue in 2022 from COVID-19 vaccines and treatments than all their other business combined. He explained that we’re already seeing Pfizer make strategic acquisitions and R&D partnerships along with other positive moves to set the company up for the post-COVID future.
MacDonald also explored case studies of AbbVie, Regeneron, and Eli Lilly outlining the short-term outlook for each of those HHL holdings.
He offered a final big-picture view of the short-term by emphasizing large-cap healthcare’s strong performance. According to Bloomberg data from the Russell 2000 healthcare index and the Dow Jones US Large Cap Healthcare index, from February 2021 to January 2022, large-cap healthcare companies have outperformed small-cap by 55%.
That outperformance speaks to the power of HHL’s investment focus on high-quality large-cap companies. Capturing that outperformance and using a covered call strategy to maximize yields, has proven to be an effective strategy to pursue growth and income. With the macro-picture for healthcare unchanged, the outlook for the healthcare sector remains strong.
“HHL is 20 large-cap healthcare companies listed on the US market, it’s one of the largest healthcare ETFs in Canada and we’ve been very consistent on our messaging about this ETF,” MacDonald said. “You’re going to wake up with a diversified portfolio of 20 companies that will pay consistent monthly income, which we’ve done for seven years.”
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Quoted in this article
Paul MacDonald, CFA
Chief Investment Officer