Investment Insights: Healthcare & Infrastructure

Whilst equity markets are priced for an optimistic outcome; investors may want to consider pivoting towards a defensive stance as economic risks have not evaporated.

Healthcare and infrastructure are among the top picks as we look for sectors that are not just compelling in the current macro climate but also primed to benefit from persistent growth drivers for decades to come.

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WHAT YOU NEED TO KNOW

Katie Brookes, iShares ETF Specialist, discusses why healthcare and global infrastructure are compelling in the current macro climate, and for the future.

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Welcome to this month’s iShares Insights. I’m Katie Brookes, iShares ETF Specialist, and this month we’ll explore healthcare and global infrastructure.

Whilst equity markets are priced for an optimistic outcome; investors may want to consider pivoting towards a defensive stance as economic risks to the downside remain. In the near term we anticipate continued equity market volatility driven by sticky inflation, geopolitical uncertainty and a potential slow down in growth.

Healthcare and global infrastructure are among the top picks as we look for sectors that are compelling in the current macro climate but will also benefit from persistent growth drivers for decades to come.

Let’s consider healthcare.

Investing in the healthcare industry presents a unique, complex and everchanging investment opportunity set that couples defensive characteristics with innovation-driven growth. As an example, investors can gain access to pharma companies which are pivoting from the pandemic and are exploring other applications of mRNA technologies to treat diseases ranging from Alzheimer’s to Parkinson’s.

Importantly, in the long-term, the growth drivers supporting healthcare demand remain. The number of persons aged 80 years or over is projected to reach 426 million globally by 2050. These changing demographics provide long-term demand and growth for healthcare products and services well into the future.

Our second sector pick is infrastructure. Infrastructure is another sector we like as part of a robust multi-asset portfolio in the current inflationary environment. By selecting a global infrastructure ETF, investors are accessing exposure to a wide range of sectors including energy, transport, communication networks, water and waste services as well as social infrastructure. Characteristics that make this investment appealing include stable cash flows, inflation linked contracts and capital stability.

In short, we anticipate continued macro and market volatility and believe investors should consider pivoting to new opportunities in sectors that can weather near-term risks whilst participate in socio-economic trends beyond the current economic cycle.

FIRST, LET’S LOOK AT THE OPPORTUNITY IN HEALTHCARE

In the near term, we anticipate continued equity market volatility driven by persistent inflation, geopolitical uncertainty, and a potential slowdown in growth. With that backdrop we believe that the healthcare sector offers an investment opportunity coupling defensive characteristics with innovation-driven growth.

The healthcare industry presents a unique, complex and everchanging investment opportunity set. As an example, investors can gain access to pharma companies which are pivoting from the pandemic and are exploring other applications of mRNA technologies to treat diseases ranging from Alzheimer’s to Parkinson’s as well as oncological applications.

Importantly, in the long-term, the growth drivers supporting healthcare demand remain. The number of persons aged 80 years or over is projected to reach 426 million by 2050. These changing demographics provide long-term demand and growth for healthcare products and services for decades to come.

ALL THIS, AT AN ATTRACTIVE ENTRY POINT

Valuations today for the healthcare sector remain attractive and below the long-run average, with FY1 P/E ratios currently at a -10% discount to broad global equity markets. These valuations are additionally attractive relative to other defensive equity sectors that have rallied following the recent market reversal.

Healthcare Relative Valuations

MSCI World Health Care Index Avg FY1 P/E Prem/Disc. vs. Broad Markets

Source: BlackRock, June 2023

BUILD INFRASTRUCTURE INTO YOUR PORTFOLIO

Infrastructure is another sector we like as part of a robust multi-asset portfolio in the current inflationary environment. Characteristics that make it appealing include stable cash flows, inflation-linked contracts and capital stability. This coupled with huge infrastructure needs as the world reorientates supply chains in response to the covid 19 pandemic and geopolitical tensions.

INFRASTRUCTURE LOOKS SET TO BENEFIT FROM ‘MEGA FORCES’ WE SEE SHAPING FUTURE RETURNS

The transition to a low-carbon economy. We believe this global reshaping presents a variety of opportunities in infrastructure. In particular, areas such as renewable energy, energy storage, and electric-vehicle charging will all need considerable direct investment in the near term. We’re also seeing increased R&D investment into energy-storage solutions and hydrogen-based systems. For more on the opportunities in mega forces see the BlackRock Investment Institute Midyear Outlook.

Shaped by growing energy-security concerns and industrial competition, an influx of transformative government legislation is driving infrastructure investments across the globe. In the U.S., the Infrastructure Investment and Jobs Act, Inflation Reduction Act, and the CHIPs and Science Act should increase energy transition and industrial investment activity in areas that have historically been underinvested.

In the EU, legislation such as the Next Generation EU Economic Recovery Package and REPowerEU will challenge existing practices and should catalyze a new wave of investment opportunities. These examples show how countries around the world are focused on passing new legislation and policies to support the energy transition.

CONCLUSION

In short, we anticipate continued macro and market volatility and believe investors should pivot to new opportunities in sectors that can weather near-term risks. We also believe that the investment thesis around participating in mega-forces that are upon us now and that reach beyond the current economic cycle is a key opportunity. Global healthcare and global infrastructure are two such exposures for investors to express this view.