Healthcare was the best-performing sector of the third quarter, jumping 14.1% — its highest quarterly gain since the first quarter of 2013. The dual tailwinds of encouraging industry fundamentals and the sector's defensive tilt led to the rally in the sector. The wave of mergers and acquisitions also added to its strength.
Solid Trends
The sector is clearly benefiting from solid corporate earnings, promising drug launches, faster drug approvals, an accelerated pace of innovation, growing importance of biosimilars, cost-cutting efforts, an aging population, ever-increasing healthcare spending, expansion into emerging markets, growing middle class, an insatiable demand for new drugs and Trump's tax reform. In particular, the new tax legislation has enticed companies to bring offshore cash back home at reduced tax rates, and the repatriated money is being used for share buybacks, dividends, acquisitions and capital spending.
Defensive Nature
The sector's non-cyclical nature is an advantage in the current environment, where concerns over trade fears and geopolitics have made investors jittery. The worries over U.S.-China trade disputes escalated in the third quarter after Trump imposed a new tariff of 10% on $200 billion worth of Chinese goods starting Sep 24. The tariff will be increased to 25% effective Jan 1. In retaliation, China slapped a tariff of 10% on more than 5,000 American products worth $60 billion.
Trump has further threatened to add a third round of tariffs on another $267 billion of Chinese imports. This would raise the total tariff to $517 billion in goods, which would mean levying duties on nearly everything China exports to the United States. The latest tariff comes on top of the $50 billion that is already in place with 25% duty. China has also hit back with tariffs of equivalent amount of U.S. exports.
Further, the emerging market turmoil especially in Turkey and Argentina, as well as faster-than-expected rate hikes in the United States, led investors' flight to defensive and stable sectors.
