Technology and Healthcare: High growth is The Best Defence

Since mid-March, when the increase in market volatility caused a sell-off in both the equity and the credit markets, investors have witnessed these two major asset classes evolve in opposite directions. From a bondholder perspective, holding low-yielding bonds combined with concerns about the impending recession, means facing a high risk of permanent loss of capital. Conversely, after a sharp drop in global valuations during 1Q20, the stock market has started a speedy recovery from its lows. Such an environment can create investment opportunities, which have the potential to provide strong, long-term positive returns to a selective, active investor.

In the current environment, within the equity space, we are witnessing the outperformance of both the Information Technology and the Healthcare sectors. It should not come as a surprise that Companies in these sectors are considered to be defensive, due to the resilience of their balance sheet and a product cycle that can allow them to perform better than the broader market in a period of recession.

In addition, prior to the crisis, both the Technology and Healthcare sectors were already trading at a discount to the S&P 500 Index as a whole, as measured by 2021 Free Cash Flow Yield estimates. Among the most attractive Technology and Healthcare Companies, which represent an ever-growing percentage of the equity index, are those that have increasingly adopted asset-light business models, leading to doubling their cash flow as a percentage of sales over the past decade.

Most importantly, Technology and Healthcare Companies are among the companies with the highest amount of business reinvestments, measured by Capex and R&D as percentage of sales. This is a healthy trend which also allows these Companies to maintain a desirable combination of high barriers to entry and high margins.

In summary, in a global market environment characterized by slow economic growth and low-interest rates, selective investments in high quality Technology and Healthcare Companies are becoming increasingly attractive and can provide a superior risk/reward opportunity due to their strong organic secular growth.

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The information in this article should not be regarded as a description of services provided by Delian Partners SA. The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.  It is only intended to provide education about the financial industry. The views reflected in this article are subject to change at any time without notice.