Sell-off has created opportunities in global health care

This year’s equities rout may not be over but brave investors may be able to find bargains in the riskier segments of the health-care sector, a CIBC portfolio manager says.

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“Given the substantial reduction of asset prices within these riskier segments, [these assets] are now becoming very, very attractive” for a certain type of investor, said Michal Marszal, senior equity analyst, healthcare, at CIBC Asset Management.

An investor looking at these opportunities should be “willing to look past the headwinds” facing financial markets over the next 12 to 18 months, he said, and look at the health-care sector from a long-term perspective.

Marszal said the MSCI World Health Care index is still trading at somewhat elevated levels even after declining almost 8% this year as of the end of April.

The more volatile Nasdaq Biotechnology index was down more than 23% for the year as of May 25, while the S&P 500 Health Care index had dropped more than 7%.

So while the health-care sector is attractive for equity investors, Marszal said there’s reason for caution.

He recommends a significant exposure to the large-cap pharmaceutical and U.S. services sector, with “very targeted” exposure to medical technologies. 

Large companies such as Johnson & Johnson, Novartis International AG and Sanofi S.A offer less volatility and are more defensive than other pockets of health care.

Within medical technologies, Marszal looks to diversified category leaders such as Medtronic plc or Thermo Fisher Scientific.

As for health-care services, he said managed care presents opportunities, pointing to names such as UnitedHealth Group and CVS Health. 

Nevertheless, Marszal said some of the riskier segments, such as biotechnology, present opportunities. 

“As usual during a sell-off, most assets within a sector like that have sold off to a comparable level regardless of their attractiveness from an upside/downside perspective,” he said.

He also said devices and life science tools are attractive after “extremely elevated” valuations last year.

These types of assets are more highly correlated with the broader technology sector, he said, where valuations were stretched.

“These are now finally coming into a more reasonable upside/downside window,” he said. 

Given the more reasonable valuations, Marszal recommends examining investments on an individual basis rather than considering possible macroeconomic scenarios for the global health-care sector overall.

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