Investors should 'look through the valley' of near-term volatility, says CIO

Chief investment officer underscores secular tailwinds and medium-term recovery outlook for healthcare and tech stocks

Investors should 'look through the valley' of near-term volatility, says CIO

While recession fears, inflation challenges, and volatility are looming large in investors’ psyches today, two thematic corners of the stock market might be worth considering for their protective and medium-term growth potential.

“For those that are looking for a bit more visibility and are worried about inflationary pressures, health care ticks all the right boxes,” says Paul MacDonald, chief investment officer at Harvest ETFs.

MacDonald notes that healthcare companies tend to be higher-margin businesses with relatively low commodity price exposure, as well as the ability to maintain a competitive advantage as they benefit from overwhelming market share. Broadly, healthcare stocks also tend to outperform in uncertain environments because demand for care is relatively insensitive to weakness in the economy.

Looking at the U.S. space, large-cap healthcare companies benefit from powerful secular tailwinds including aging demographics in advanced economies and the prospective growth of the developing world, while capturing opportunities from growth due to technological innovation.

In a year of gloom and turbulence, healthcare has been a relative bright spot; while the S&P 500 Healthcare Sector Index is down roughly 5% for 2022 so far, it’s still doing better than its parent benchmark, which has sustained a -16.22% year-to-date loss. The downward price movement on healthcare this year, MacDonald says, puts numerous names in the sector squarely in bargain territory.

He also recommends technology as a space to watch, with a medium-term outlook of significantly higher use by both enterprises and individuals in the next three to five years. Tucked within the large-cap tech space are some genuine leaders, with quality balance sheets and robust track records waiting to be revealed to active managers with the ability and volition to look.

Of course, the sector has taken it hard on the chin. The S&P 500 Information Technology Sector Index has lost roughly 20% so far in 2022. The tech-heavy NASDAQ, meanwhile, has suffered a deeper loss of approximately -27.72%.

Underlying that pain is a panoply of challenges that have been on full display over the past few months. Inflation is taking its toll, pushing many firms to re-evaluate their outlook of continued momentum in favour of digital adoption as the world emerges from the pandemic. On top of supply-chain pains in the hardware space, earnings pressure from rising interest rates has also weighed on the growth-heavy category, precipitating layoffs at several high-profile tech companies.

“Large-cap technology stocks have been under a lot of pressure. And we know we do need some patience and time,” MacDonald says.

To help investors hold on through stomach-lurching downturns and volatility in the near term, he suggests that they consider getting exposure to their preferred sectors through covered-call strategies, which offer a dose of protection on the downside, in the form of “bird in the hand” income, in exchange for limited participation in the potential gains of stocks.

“As we look through the valley and take the longer-term view of a recovery in the tech space, things look actually quite optimistic,” MacDonald says. “But you do have to look through some of the clouds of the current environment.”