The macroeconomic environment looks relatively positive at present, which explains why we remain overweight equities and underweight government bonds. However, we are always looking for ways to diversify our portfolios through more thematic ideas.
US healthcare and industrials are two examples. Diversification benefits come in the form of attractive sector-specific characteristics, while holding them together reduces any directional bias to risk appetite or economic growth expectations - healthcare being more defensive and industrials more cyclical.
Healthcare: A defensive sector with growth opportunities
Healthcare is the more interesting of the two, not least because our view on the economy and the natural read-through to corporate earnings does not tally up with the defensive nature of the industry. The sector tends to have quite stable earnings growth - as opposed to cyclical exposure to a pick-up in the economy - but offers two attractive features.
Firstly, while there is currently no shortage of ways to express a positive view on economic growth - for example, being long equities, short government bonds or duration, or taking any one of a number of cyclical positions available in the equity market - there are fewer options for investors to diversify with a position that could outperform if markets entered a risk-off period.
However, healthcare tends to do well when risk appetite reduces. In part, this is because its business drivers do not depend on economic sentiment and the quantity of available discretionary spending, but on factors like government spending programmes and the development pipeline of new drugs. In addition, the earnings profile and earnings growth have been more stable for the sector than the overall market.
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