A sector for volatile times? | BetaShares

A sector for volatile times?

BY Eliza Yencken | 2 August 2022
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sector for volatile times

Throughout 2020 and 2021, the world witnessed numerous lockdowns, business closures, event cancellations and work from home policies, triggering a deep economic downturn. While many were hopeful for 2022, the economic shock has continued as high inflation, rate rises, and growth fears have triggered a market sell-off.

Recession fears

Recently, the US reported its latest data on inflation, revealing that the cost-of-living has surged to a 40-year high, largely driven by post-pandemic demand and the Russian invasion of Ukraine.1 This resulted in the Federal Reserve raising interest rates in March for the first time since 2018, and creating strong impetus for the Fed to continue rapidly hiking rates to cool the economy down.2

As the Fed attempts to bring inflation down, banks have ramped up projections for interest rate hikes. Earlier this year, we saw some shorter-dated bond yields surge higher than longer-term bond yields, causing an inverted yield curve,3 which historically has been a strong indicator for a recession to occur 12-18 months after the inversion.4 As a result, many economists are now predicting that the US will fall into a recession in late 2023.5

Amid these fears, consumers have slowed their spending and have been forced to shift their habits away from general spending towards necessities.6 Further, we have seen these recessionary fears and rising rates spook markets, with many indices falling into a bear market – the Dow Jones Industrial Average has fallen 12.28% year to date (YTD), the S&P 500 has fallen 17% YTD and the NASDAQ Composite has fallen 24% YTD (as at 21 July 2022).7

A sector that has shown resilience during uncertain times

Given the uncertainty in today’s market, investors may wish to seek stability through less cyclical sectors in attempt to reduce portfolio volatility. Sectors with more stable earnings that are historically less correlated with the overall sharemarket have tended to experience smaller drawdowns when the broader market has fallen. Consumer Staples, Healthcare and Utilities typically have functioned in a non-cyclical manner and could offer less volatility during recessionary environments.

Large global healthcare companies could be considered to have “defensive” qualities when compared to other equity sectors, with historically lower drawdowns during periods of broader equity market weakness, as they have inelastic demand for their products and high pricing power. For example, it was recently reported that, as at June 2022, a Goldman Sachs Group Inc. index that consists of mega-cap technology and healthcare companies had risen to more than an 18-month high relative to the MSCI All Countries World Index.8

The charts below demonstrate how global healthcare (represented by the Nasdaq Global ex-Australian Healthcare Hedged AUD Index, which the BetaShares Global Healthcare ETF – Currency Hedged (ASX: DRUG) seeks to track, net of DRUG’s management fees and costs) has performed when compared to global shares (represented by the MSCI All Countries World Index, hedged to AUD) in times of volatility and share market drawdowns.

 

Past performance is not indicative of future performance of any index or ETF.
Source: Bloomberg, BetaShares. Indices are re-based to 100 as at 30 March 2001. You cannot invest directly in an index.

Past performance is not indicative of future performance of any index or ETF.
Source: Bloomberg, BetaShares. Indices are re-based to 100 as at 2 July 2007. You cannot invest directly in an index.

Past performance is not indicative of future performance of any index or ETF.
Source: Bloomberg, BetaShares. Indices are re-based to 100 as at 20 February 2020. You cannot invest directly in an index.

How can Australian investors get exposure?

Investors can access the global healthcare sector via the BetaShares Global Healthcare ETF – Currency Hedged (ASX code: DRUG). DRUG offers Australian investors a convenient and transparent way to gain exposure to a portfolio of the largest global healthcare companies (excluding Australia), without the need to take unnecessary stock-specific risk, and with the benefit of substantially reduced exchange-rate risk. As a fund domiciled in Australia, investors can avoid many of the tax and administrative burdens (such as a W8-BEN form) that may otherwise arise from other investment vehicles that provide exposure to international companies.

 

There are risks associated with an investment in DRUG, including market risk, international investment risk, healthcare sector risk and concentration risk. DRUG may be subject to higher volatility than the broader market given its sector concentration. An investment in DRUG should only be considered as a component of a broader portfolio. For more information on the risks and other features of DRUG, please see the Product Disclosure Statement available at www.betashares.com.au. A Target Market Determination is also available at www.betashares.com.au/target-market-determinations.

  1. https://theconversation.com/inflation-hits-fresh-40-year-high-pushing-fed-to-get-more-aggressive-with-interest-rates-and-the-beveridge-curve-should-give-it-courage-to-do-so-184896
  2. https://www.cnbc.com/2022/03/16/federal-reserve-meeting.html
  3. https://www.reuters.com/markets/us/us-yield-curve-inverts-again-what-is-it-telling-us-2022-06-13/
  4. https://www.forbes.com/sites/simonmoore/2022/06/24/multiple-signals-now-point-to-us-recession/?sh=376bf9ea6290
  5. https://www.abc.net.au/news/2022-04-21/recession-warning-bond-market-economic-downturn/101001956
  6. https://corporate.walmart.com/newsroom/2022/07/25/walmart-inc-provides-update-for-second-quarter-and-fiscal-year-2023
  7. https://www.marketwatch.com/
  8. https://www.bloomberg.com/news/articles/2022-06-24/recession-trades-mount-as-powell-triggers-rush-to-defensives

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