Global Weekly Commentary: Why we favor tech and healthcare
The pandemic has sped up structural trends that are benefiting sectors such as technology and healthcare – and we believe these trends are not fully priced in.
Rising inflation expectations have driven up U.S. 10-year Treasury yields but to a lesser degree than in the past, in line with our new nominal theme.
Data on credit growth in China this week could shed light on the degree of ongoing policy support amid softening economic activity.
The pandemic has turbocharged transformations that were already under way – from sustainability to inequality. Yet markets have not fully priced in the durability of these trends, we believe, even with the glimpse into the future offered by the pandemic. We favor technology and healthcare on a tactical horizon, as they offer both quality characteristics and are likely beneficiaries of structural growth trends.
Chart of the week
Return on equity and free cash flow yields of U.S. stocks by sector, 2021
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, February 2021. Notes: U.S. stocks are represented by the MSCI USA Index. Data are based on a trailing 12-month basis. The free cash flow yield of financials isn’t comparable to others due to the sector’s unique nature.
Healthcare and technology led the U.S. stock market in generating earnings and revenue growth in 2020. They also stand out in generating high free cash flow yields and return on equity, as the chart shows. The quality characteristics of these two sectors could help provide some resilience against any bumps along the road to the economic restart, in our view. At the same time, they offer long-term growth potential given structural shifts such as digitalization and aging societies. Such quality exposures sit on one side of our bar-belled approach to tactical asset allocation; on the other side, we like selected cyclical exposures such as emerging market equities and U.S. small caps, which we see as benefiting from a vaccine-led restart. Market pricing has come a long way since late last year, yet we still see accelerated structural trends not yet fully reflected. We believe they could drive performance over the tactical horizon. History suggests financial markets are imperfect at pricing in long-term trends, even when these shifts – such as demographic changes – are expected long in advance.
Stock markets have hit new highs, led by the steady outperformance of tech stocks. We don’t see overall equity valuations as obviously stretched, as we expect low interest rates and a vaccine-led economic restart to support risk assets over the next six to 12 months. We also see sector-specific drivers for growth. The pandemic has made the case for accelerating the shift to digital across a broad range of industries. One factor to consider: Rising production costs amid the rewiring of global supply chains – another structural trend reinforced by the pandemic – has made cost-saving technology investment a priority over traditional capex. Other trends are also supportive of the sector. About 38% of the U.S. workforce teleworked in early-mid January, according to the U.S. Census Bureau. We expect the share of employees working remotely at least part-time to fall once the restart materializes – but to remain above the pre-pandemic levels. This shift improves the outlook for companies behind the software, cloud and security infrastructure necessary to support a more dispersed workforce.
We see the healthcare sector potentially benefitting from structural trends such as demographic shifts, emerging market healthcare spending growth and innovation across the board. For example, telemedicine has gained popularity during the pandemic, and could become a long-term solution for some care needs due to its cost and operational efficiency. We also see the relatively low valuation of the healthcare sector as appealing, and the risk of major policy change in the U.S. appears low given Democrats’ slim majority in the Senate. An expansion of Obamacare could be positive for the managed healthcare industry in the U.S, or health insurance providers. Elsewhere in the sector, the pandemic has hit demand for elective procedures and cancer care. A vaccine-led economic restart would likely help drive a rebound in these businesses.
Another key trend is the tectonic shift toward sustainable investing. We will soon incorporate climate considerations into our capital market assumptions – our long-run estimates of risk and return – to help investors prepare their portfolios for a transition to a lower carbon economy. Read our CEO Larry Fink’s 2021 letter to CEOs on BlackRock’s commitment.
The bottom line: We favor tech and healthcare in tactical portfolios for their quality characteristics and the potential to benefit from long-term structural trends. A risk to our view: The pandemic has afforded greater visibility into future trends, yet more of this may now be priced in – and our visibility is still imperfect; some trends could reverse or change over time.
© 2021 BlackRock, Inc. All rights reserved.
General disclosure: This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of Feb. 8, 2021, and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. Asset allocation and diversification does not guarantee investment returns and does not eliminate the risk of loss.
In the U.S. and Canada, this material is intended for public distribution. In EMEA Until 31 December 2020, issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 2020394, has issued this document for access by Professional Clients only and no other person should rely upon the information contained within it. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. From 31 December 2020, in the event the United Kingdom and the European Union do not enter into an arrangement which permits United Kingdom firms to offer and provide financial services into the European Union, the issuer of this material is:(i) BlackRock Investment Management (UK) Limited for all outside of the European Union; and(ii) BlackRock (Netherlands) B.V. for in the European Union, BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20-549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded. In Switzerland, this document is marketing material. This document shall be exclusively made available to, and directed at, qualified investors as defined in the Swiss Collective Investment Schemes Act of 23 June 2006, as amended. For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the “Advice Law”), nor does it carry insurance thereunder. In South Africa, please be advised that BlackRock Investment Management (UK) Limited is an authorized financial services provider with the South African Financial Services Board, FSP No. 43288. In the DIFC this material can be distributed in and from the Dubai International Financial Centre (DIFC) by BlackRock Advisors (UK) Limited — Dubai Branch which is regulated by the Dubai Financial Services Authority (DFSA). This material is only directed at 'Professional Clients’ and no other person should rely upon the information contained within it. In the Kingdom of Saudi Arabia this information is only directed to Exempt Persons, Authorized Persons or Investment Institutions, as defined in the relevant implementing regulations issued by the Capital Markets Authority (CMA). In the United Arab Emirates this material is only intended for -natural Qualified Investor as defined by the Securities and Commodities Authority (SCA) Chairman Decision No. 3/R.M. of 2017 concerning Promoting and Introducing Regulations. Neither the DFSA or any other authority or regulator located in the GCC or MENA region has approved this information. In the State of Kuwait, those who meet the description of a Professional Client as defined under the Kuwait Capital Markets Law and its Executive Bylaws. In the Sultanate of Oman, to sophisticated institutions who have experience in investing in local and international securities, are financially solvent and have knowledge of the risks associated with investing in securities. In Qatar, for distribution with pre-selected institutional investors or high net worth investors. In the Kingdom of Bahrain, to Central Bank of Bahrain (CBB) Category 1 or Category 2 licensed investment firms, CBB licensed banks or those who would meet the description of an Expert Investor or Accredited Investors as defined in the CBB Rulebook. The information contained in this document, does not constitute and should not be construed as an offer of, invitation, inducement or proposal to make an offer for, recommendation to apply for or an opinion or guidance on a financial product, service and/or strategy. In Singapore, this is issued by BlackRock (Singapore) Limited (Co. registration no. 200010143N). This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. In Hong Kong, this material is issued by BlackRock Asset Management North Asia Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong. In South Korea, this material is for distribution to the Qualified Professional Investors (as defined in the Financial Investment Services and Capital Market Act and its sub-regulations). In Taiwan, independently operated by BlackRock Investment Management (Taiwan) Limited. Address: 28F., No. 100, Songren Rd., Xinyi Dist., Taipei City 110, Taiwan. Tel: (02)23261600. In Japan, this is issued by BlackRock Japan. Co., Ltd. (Financial Instruments Business Operator: The Kanto Regional Financial Bureau. License No375, Association Memberships: Japan Investment Advisers Association, the Investment Trusts Association, Japan, Japan Securities Dealers Association, Type II Financial Instruments Firms Association.) For Professional Investors only (Professional Investor is defined in Financial Instruments and Exchange Act). In Australia, issued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975 AFSL 230 523 (BIMAL). The material provides general information only and does not take into account your individual objectives, financial situation, needs or circumstances. In China, this material may not be distributed to individuals resident in the People’s Republic of China (“PRC”, for such purposes, excluding Hong Kong, Macau and Taiwan) or entities registered in the PRC unless such parties have received all the required PRC government approvals to participate in any investment or receive any investment advisory or investment management services. For Other APAC Countries, this material is issued for Institutional Investors only (or professional/sophisticated /qualified investors, as such term may apply in local jurisdictions). In Latin America, for institutional investors and financial intermediaries only (not for public distribution). No securities regulator within Latin America has confirmed the accuracy of any information contained herein. The provision of investment management and investment advisory services is a regulated activity in Mexico thus is subject to strict rules. For more information on the Investment Advisory Services offered by BlackRock Mexico please refer to the Investment Services Guide available at www.blackrock.com/mx
Not FDIC Insured | May Lose Value | No Bank Guarantee
© 2021 BlackRock, Inc. All Rights Reserved. BLACKROCK, iSHARES and ALADDIN are trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.