Amid an impressive resurgence, previously downtrodden cyclical sectors are receiving plenty of attention to start 2021 – and rightfully so – but advisors shouldn't overlook opportunities in economically sensitive and defensive groups.
That includes technology and healthcare. With those sectors being the two largest in the S&P 500, combining for over 41% of the benchmark's weight, it may sound redundant to advisors that the groups merit attention. Still, it's worth examining some of the catalysts that could power these important segments higher in 2021.
For starters, both sectors have enviable quality traits, including return on equity (ROE) and free cash flow yield. Based on those metrics, technology and healthcare are two of the top four among the 11 GICS sectors. On a related note, the cyclical groups investors are becoming so fond of – energy, financials, materials and real state – are the four worst sectors based on ROE and free cash flow yield.
“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,” said BlackRock. “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.”
Again, It's Time for Tech
Owing to its disruptive and innovative properties, technology has long been one of the leading domestic sectors. Advisors know as much, but despite that long-running success, the sector isn't in danger of falling out of favor soon. In fact, the coronavirus pandemic likely cemented its status as a cornerstone in many client portfolios.
“The pandemic has made the case for accelerating the shift to digital across a broad range of industries,” notes BlackRock. “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.”
Within the technology arena, cloud computing and cybersecurity – already growing before the pandemic – remain appealing due in part to the work from home renaissance.
Yes, many workers will return to offices when COVID-19 is a thing of the past. Two things on that matter. First, it's still unclear when the virus will be vanquished. Second, while there will be a re-migration back to offices, work from home levels will remain elevated relative to pre-pandemic levels. Some companies have cost motivations, but the bottom line is dozens are already moving to long-term work from home models for some staffers and that's a win for the tech sector.
Positive Prognosis for Healthcare
An obvious result of the pandemic is that healthcare spending is rising and that's a potential plus for clients.
““In our Q1 2021 forecast round, we raised our global healthcare spending forecast for 2021, as the resurgence in COVID-19 infections triggered additional spending,” notes IHS Markit. “Global healthcare spending in 2021 is now forecast to go up to USD9.23 billion, up from a previous forecast of USD9.14 billion.”
Good news: There are other non-pandemic shifts at play in the second-largest S&P 500 that will carry the day when the coronavirus is a thing of the past.
“We see the healthcare sector potentially benefitting from structural trends such as demographic shifts, emerging market healthcare spending growth and innovation across the board,” notes BlackRock. “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.”
Making the sector all the more appealing are attractive valuations and relatively benign political risk because this, thank goodness, isn't an election year.