Prepare portfolios for a healthy defence

The budget shutdown and continuation of quantitative easing have changed the way investors view healthcare stocks, particularly amid uncertainty over Obamacare.

With Australian healthcare shares generating the bulk of their revenues in the US, perceptions of how the US healthcare sector is tracking is of increasing importance to these companies. 

The first day of the US government shutdown saw the healthcare sector of Dow Jones leave the market in its wake, gaining 1.3 per cent against a broader market gain of 0.41 per cent. With the US government basically on a forced hiatus over Obamacare, healthcare stocks are almost flagging the final outcome.

Uncertainty over the outcome of Obamacare and investors' preferences to load up on risk overwhelmed domestic healthcare stocks during September, resulting in the sector losing 2.4 per cent. CSL Limited, contributing to nearly half of the index, lost 5.8 per cent.

In terms of performance over the past year, the ASX 200 has gained 17 per cent against 30 per cent for the healthcare sector.

Domestically there was no data to suggest the healthcare sector was going to run into any roadblocks in September. Growth in pathology and diagnostic imaging is still going strong and reached above-growth numbers of 6.3 and 6.9 per cent last financial year.

There are other factors that will drive the healthcare sector in the future. The continuation of the Federal Reserve’s bond-buying program has resulted in risk-chasing being fruitful for investors.

Enduring monetary stimulus against the current economic backdrop will change how defensive and healthcare stocks are viewed by investors.

A possible catalyst for returning defensives to the main stage would be if the yield on the US Treasury Note continues to fall, which should happen if tapering hasn't commenced. It won’t be long until investors shift their preferences once again, as investments leveraged to the business cycle begin to show signs of faltering.

One of the appeals of the healthcare sector is government spending and the subsidies that help companies earn their profits. The uncertainty surrounding this was enough to rattle healthcare investors. Consequently, a little more assurance is going to be well received by the market.

Having a budget shutdown is something markets have experienced before, but not against a backdrop of quantitative easing. As a result, the environment created for equity markets is artificial and should serve as a reminder to the importance of defensive investments.

The past month has seen the healthcare sector as competing against the more exciting looking consumer discretionary sector and the uncertainty facing Obamacare. With more clarity around both of these influences, the fundamentals suggest healthcare is well placed to keep pace with the broader index.