Estimated read time: 4 minutes
Publication date: 17th Sep 2020 14:54 GMT+1
Healthcare spending in the U.S. is one of the largest in this world. According to Statista, the size of the US healthcare market was $ 2.5 trillion in 2019, which focuses mainly on research, innovation, and medical technology.
The updated projections by The Centers for Medicare and Medicaid Services (CMS) suggest that the total healthcare expenditure (private and public) in the US would continue to climb at startling rates.
The numbers say that American spending on overall healthcare will climb at an average rate of 5.5% over the next ten years. In fact, healthcare expenditure is likely to grow at a faster pace than the US economy.
From 17.9% of the GDP in 2017, the share of the healthcare market is projected to account for 19.4% of the GDP in 2027. Rising medical costs and an aging population in the US are the primary factors responsible for it.
Healthcare outperformed the broader index
With this kind of phenomenal projections, we can see that the healthcare sector is poised for long-term growth. Investors are set to benefit from this growth once they know the nuances of the sector.
Healthcare is one sector that has a lot of intricacies. In the US, the healthcare sector broadly comprises of all the companies involved in selling pharmaceuticals, biotech, medical devices, hospitals as well as healthcare insurance.
The bull run of Wall Street came to a jolting halt as the first half of 2020 ended. Healthcare stocks are defensives, which means that they tend to perform well even during downturns and recession. At a time when the entire world is awaiting the launch of a COVID-19 vaccine, the significance of the sector has pushed several stocks to all-time highs.
The Health Care Select Sector SPDR ETF (AMEX: XLV), which represents the healthcare stocks has outperformed the broader S&P 500 index in recent times. Over the past one-year, XLV has returned nearly 17% compared to the 13.5% growth by SPDR S&P 500 ETF (AMEX: SPY).
Regeneron Pharmaceuticals and Horizon Therapeutics are two such stocks that have seen immense momentum in 2020. Both these companies posted robust quarterly results and have more than doubled since January 2020.
Digitization to change the game
The healthcare sector is ever-evolving. From increased digitization in delivery models to DIY medical devices, this sector is about to see a lot of new trends. Collecting consumer data and building business models around the same will be on the rise.
There are various at-home medical devices in which the patient themselves enter their data. Some of these are the blood-pressure and blood-sugar monitors, test kits for flu or pregnancy as well as devices for maintaining personal medical records. This gives access to medical companies to derive insights and create innovative healthcare solutions.
Regulations and impending Presidential election pose challenges
Investing in healthcare stocks also comes with a fair share of caveats. The sector is heavily regulated. Further, if pharmaceutical companies and device makers fail to comply with the guidelines of the US Food and Drug Administration (FDA), it would drastically impact their stock.
Besides this, healthcare stocks are more exposed to litigation risks. If ever any patient or consumer faces any harm after using the product or consuming the medicines, they can directly sue the company and demand hefty compensations.
In the current scenario, the healthcare sector also stands at the cusp of significant change ahead of the US Presidential election 2020. The results will have a significant impact on healthcare stocks. The fate of pricing transparency cost regulations as well as the Affordable Care Act and the Medicaid hinges on the November 2020 elections. Currently, there is a lot of uncertainty around the policy environment of the US healthcare segment.
An attractive sector for investment
That said, there is no denying that the healthcare stocks definitely look attractive at the moment, especially the ones involved in developing a COVID-19 vaccine and developing anti-viral therapeutics. Investors must weigh the challenges and focus on growth prospects of the stocks before making a choice.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
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