Bat-sh*t crazy

DOUG  By Guest Blogger Doug Rowat


It turns out that bats are the source of all the world’s major virus problems. According to Business Insider:

In the past 45 years, at least three other pandemics (besides SARS) have been traced back to bats. The creatures were the original source of Ebola, which has killed 13,500 people in multiple outbreaks since 1976; Middle Eastern respiratory syndrome, better known as MERS, which can be found in 28 countries; and the Nipah virus, which has a 78% fatality rate.

And the coronavirus is apparently no exception: bats are the most likely cause. And with 10 billion or so bats in the world, future pandemics are a certainty.

At last count, the number of global coronavirus infections sits at about 26,000. However, it’s spreading so fast that by the time you’re reading this that number has likely jumped significantly.

With all the drug companies now involved in vaccine research, you’re probably thinking that the health care sector must have been a pretty good investment over the past month. But, alas, the S&P 500 Health Care Index has actually underperformed the broader market over this span.

This is probably because investors recognize that the coronavirus will have limited-to-zero impact on the bottom lines for drug companies. The approval period for most vaccines is about 10 years, and even if it’s fast-tracked, an approved vaccine could still be 2–3 years away. So, looking to the drug developers to save us from the coronavirus is a misplaced trust. The solution, as it was with SARS and Ebola, is likely to be simple containment. But, of course, if the virus is contained then the revenue opportunity for a vaccine is, needless to say, significantly diminished.

The health care sector actually does best not when the world’s health problems require quick action, but rather when its health problems are lingering and not completely solvable: high cholesterol, arthritis, heart disease, cancer, long-term care, etc.

So, buying the health care sector to ‘play’ the coronavirus is certainly the wrong reason to own the sector; however, allow me to explain a few of the right reasons.

Most importantly, the world’s population is rapidly aging, which results in more demand for health care services. In particular, the wealthy regions of Europe and North America have rapidly aged over the past 15 years (2000–2015). The below chart shows the relationship between the shift in demographics and the massive outperformance of the S&P 500 Health Care Index:

United Nations: percentage population 60 and over

Source: United Nations, Bloomberg, Turner Investments; market returns are cumulative total return from 2000 to 2015

The dotted lines show the forecasts—the accelerating trend clearly won’t be moderating in the coming decades. Obviously, the future performance of the health care sector can’t be predicted precisely, but the favourable demographics will, undoubtedly, be strongly supportive of the sector.

Having health care exposure also provides another built-in benefit for your portfolio: defensiveness. This is illustrated in the performance of the sector over the previous three US recessions dating to the 1990s. In each instance, the health care sector outperformed, often strongly. So, if you’re looking for added volatility control and downside protection, look no further than health care.

US recessions are the S&P 500 Health Care Index (%): health care shines defensively

Source: Bloomberg; NBER; Turner Investments; market returns are the cumulative total return during each recession

So, the health care sector won’t save us from the next pandemic, but if you’re a long-term investor, it just might help save your portfolio.

We’ll let Ozzy Osbourne save us from the bats.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.



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