Health Care is the worst-performing S&P sector so far this year, but Wilmington Trust Chief Investment Officer Tony Roth believes there are attractive investment opportunities in the beaten-down sector.
div > div.group > p:first-child">This is in part because of the defensive nature of health care, which has not been helpful in a rally dominated by highly cyclical names . It is also due to policy risk, which has ramped up dramatically as the 2020 U.S. presidential election is brought into focus.
This policy risk is considerable — and contributes to our decision to be neutral health care in our sector strategy — but it is important to look beneath the surface. We tend to think of technology companies as being the biggest disruptors, but the innovation occurring within health care is arguably greater than any other area of the economy and is leading us to find some attractive investment opportunities in a beaten down sector.
It seems that no matter who we listen to on the 2020 campaign trail, their policy vision poses a direct threat to some area of the health care sector, but also greater opportunity as many seek in some way to broaden the base of health care consumption and/or the level of federal subsidization of that usage.The Trump administration has backed continued legal challenge of the Affordable Care Act, which could be revisited by the U.S.
While the road to legislative action on any of these issues is at best incredibly long, winding, and covered by fog, it is prudent to proceed with caution. The veil of political uncertainty could weigh on the overall health care sector until or even beyond the 2020 election.That said, it would be unwise for the long-term investor to write off all health care stocks, as this also happens to be one of the sectors experiencing the most rapid pace of innovation.
Going forward, it will be increasingly important for investors to balance the political risks with innovation opportunities, all with an eye toward reasonable valuations. In general, where the political risks are higher—in managed care, hospitals, and pharmaceuticals—the valuations based on forward-looking earnings estimates are more reasonable.
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