Using health-care stocks for defensive positioning

In the face of global economic challenges, the health-care sector stands out for its resilience, says a portfolio manager at CIBC Asset Management.

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“It is important to remind investors that as a sector, health care is rather macro-economically defensive,” said Michal Marszal, portfolio manager for global heath-care equities at CIBC Asset Management.

According to Marszal, pharmaceuticals and health-care services maintain a steady demand profile throughout economic cycles. However, he said approximately 15% of the sector, including medical devices and elective procedures, remains sensitive to economic downturns.

Regional variations in economic resilience also exist, he said, with North America demonstrating relative strength, while Europe faces pockets of weakness.

The slower economic recovery in China, especially in the context of demand for discretionary medical procedures, has also had implications for the global health-care sector. However, he said the backlog of cases from the pandemic that was worked through in 2023 somewhat muted the impact.

Looking at the effect of inflation on the sector, Marszal identified two factors: subsiding demand and supply chain improvements.

Weakened demand from high interest rates has primarily affected longer-duration assets, he said, in particular small- and mid-capitalization companies in sectors such as biotechnology.

On the positive side, Marszal said easing supply chain constraints have reduced inflationary pressures, benefiting the broader health-care technology sector responsible for manufacturing devices and research tools.

Research and development (R&D) remains at the heart of the health-care industry, Marszal said, driving value through innovation. The biopharmaceutical sector, with its significant R&D investments by multinational companies, plays a role in advancing therapeutic categories like oncology, neurology, and cell senescence research.

“We have obviously seen over the last decade or so a tremendous growth within the biotech space,” Marszal said.

Further, he said artificial intelligence is emerging as a tool to accelerate early-stage R&D activities, potentially enhancing overall research productivity.

In contrast, medical devices and research tools experienced more modest innovation: “It’s less revolutionary, more evolutionary,” Marszal said.

Additionally, he said health-care services like contract research organizations and contract manufacturing also contribute significantly to R&D progress.

“These are fairly attractive growth opportunities from an investment perspective because they effectively represent an exposure to the types of trends that I have just highlighted,” he said.

In terms of investments, Marzal named Roche and Novartis in the global biopharmaceutical industry, and Medtronic and Thermo Fisher in the broader health-care technology space, all recognized for their diversified businesses and innovative pipeline assets.

Within health-care services, Marszal said CVS is an attractive investment opportunity, and recommended IQVIA for its R&D services and because it has been at the forefront of adopting AI tools.

While Marszal is optimistic about the sector’s resilience, he said investors should pay attention to regulatory developments, particularly in regions such as the United States, Europe, Japan and China — especially because discussions about health-care cost savings could intensify during election cycles.

However, he said, “I do not foresee any significant actual developments that will materially change the growth outlook for the entire space.”

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