The stock market is reeling and the odds of Canada and the U.S. economies tipping into a recession are increasing. A recession is generally defined as two consecutive quarters of negative GDP. Canada’s economy contracted 0.1% in July after four straight quarters of growth. It hasn’t recorded a full quarter of negative GDP growth this year but the Conference Board of Canada said the odds of a recession is 50/50, or down to a coin toss.

The odds of a recession in the U.S. are even greater, at 60%, as the world’s largest economy showed signs of slowing over the summer. In June, the odds of a recession were just 40%.

A recession is never good for a portfolio, it generally means people spend less, corporate earnings fall, and share prices tumble. But recessions don’t impact all sectors in the same way.

Recessions are typically bad for discretionary stocks, this includes travel/tourism, retail, restaurants, leisure/hospitality, real estate, and manufacturing/warehouse. Meanwhile, safe haven investments become increasingly popular during recessions because they have a history of providing stable revenue growth and reliable earnings.

One sector that many investors may seek shelter in during times of economic turmoil is healthcare.

How Have Healthcare Stocks Performed in Previous Recessions?

Historically, healthcare stocks are a defensive play that perform well during a recession. That’s because they provide products and services that are always in demand. When money is tight, people will probably give up discretionary spending, like a vacation or other expensive non-essentials, but they are not going to cancel their prescriptions or stop buying band aids, cold medicine, or other healthcare products.

That doesn’t mean healthcare stocks are recession-proof, but they are recession-resilient and tend to bounce back, minimizing losses more quickly. Case in point, during the brief pandemic-fueled recession in 2020, big name pharmaceutical companies like AstraZeneca, Sanofi SA, and Novartis AG all experienced a sell-off, much like the broader stock market did, but their share prices rebounded quickly.

AstraZeneca recovered from all of its share price losses in less than two months. By June 2020, Sanofi was trading above its February highs, and in January 2021, Sanofi hit a new record high.

Even if we go back to the Great Recession of 2008, which was significantly longer, the results were the same. Again, this is because even during recessions, people still rely on healthcare products and services. Few other sectors can lay claim to being that essential.

 

Why Do Healthcare Stocks Do Well Even During Recessions?

Big pharmaceutical stocks tend to perform relatively well during recessions for a number of reasons, some of the biggest include increased government spending on healthcare, an aging population, and their strong balance sheets.

When the economy is stable or performing to the upside, investors are willing to overlook a company’s weak balance sheet because they are confident in their underlying business and the fact that they will eventually generate income.

Poor macroeconomic conditions and rising interest rates hurt stocks that are not profitable because those companies need to borrow money to keep their businesses operational. Higher interest rates means it costs more to borrow, which increases their debt loads, drives down profits, or leads to greater losses and lower sales.

During recessions, fundamentals become more important with investors paying closer attention to balance sheets, cash flows, and guidance. This helps explain why during recessions, many investors shun speculative growth stocks and instead focus their attention on blue chip healthcare stocks with strong balance sheets.

How Much Does Canada and the U.S. Spend on Healthcare?

Rising healthcare costs around the world is another reason that supports long-term growth trends in the healthcare industry. In Canada, total health spending climbed to more than $308 billion in 2021, or $8,019 per Canadian. That’s up 12.8% from 2020. The big surge came on the heels of the pandemic. The growth rate in 2021 slowed to 2.2%, or 12.7% of GDP, which is more in line with historical spend.

Like other developed countries, Canada has seen its healthcare spending grow, and, at times, faster than the overall economy. Hospitals is the largest healthcare spending category at 25%, followed by drugs at 14%.

Canada is among the highest spenders when it comes to healthcare in the Organization for Economic Co-operations and Development, but it’s not the highest. Canada trails Sweden, Germany, France, and the U.S. The U.S. spends the most at 19.7% of GDP or $12,530 per person.

From 2019 to 2028, national health spending in the U.S. is expected to grow at an annual rate of 5.4% to $6.2 trillion.

How Does the Ageing Population Impact Healthcare?

The ageing global population is also a boon for healthcare stocks. There were approximately 76 million people born between 1946 and 1964 in the United States, the window for the baby boomer generation. In 2011, the first baby boomers entered retirement. Over a 19-year period, four million baby boomers will retire each year, or almost 11,000 people per day. By 2030, all baby boomers will be at least retirement age.

Canadians aged 65 and older account for around 18% of Canada’s population, up from 14% a decade ago. But they account for 45% of all public-sector healthcare spending. In the U.S., retiring baby boomers will push U.S. health spending to more than $6 trillion by 2028.

It’s not just the baby boomers that will drive innovative healthcare spending. The children of baby boomers, millennials, those born from 1981 and 1996, represent an even larger set of the population.

In Canada, millennials now account for 7.92 million, or over one-fifth of Canada’s population. In the U.S., there are more than 83 million millennials, representing more than 25% of the country’s population. In 2047, the first millennials will begin to retire. Over the following 18 years, in North America alone, 13,830 millennials will retire every day, which is expected to further increase healthcare spending.

Healthcare stocks have historically outperformed the broader markets during economic downturns. It’s important to remember that while the sector is more defensive than others, there are tailwinds that support the healthcare sector’s long-term growth.

Investing in a Healthcare ETF

One way to simplify investing in the cutting-edge healthcare industry is through an ETF. A healthcare ETF offers a diversified portfolio of holdings in healthcare stocks. ETFs ensure that your risk is diversified, but that you are still invested in blue-chip names that you trust.

Evolve Global Healthcare Enhanced Yield Fund (LIFE ETF) provides investors with exposure to twenty global blue-chip companies in the healthcare industry, with a covered call strategy that is actively managed to provide increased yield potential while helping mitigate risk. LIFE ETF is available in hedged, unhedged and USD classes, as well as mutual fund versions.

For more information about the Evolve Global Healthcare Enhanced Yield Fund or any of Evolve ETF’s lineup of exchange-traded funds, please visit our website or contact us.

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