Future Returns: Opportunity in Global Healthcare

The shares of healthcare companies often aren’t the first to take off when the economy recharges, but strategists at Citi believe the sector is inexpensive and worth a look.

Citi Private Bank shifted a recommendation that investors overweight their stock allocation to global healthcare by 2% to 4% in late April. That means healthcare now represents half of the bank’s recommended 8% overweighting to global stocks, making it a substantial bet.

Typically healthcare “is a more defensive asset,” says David Bailin, chief investment officer and global head of investments at Citi Global Wealth. But the bank is making this bet because “healthcare looks unusually cheap.”

Shares in healthcare companies have risen only by 15% since the end of 2019, including a 5% gain for the year through mid-April—a significant lag to the double-digit gain in the S&P 500 in that time period, according to Cit Private Bank’s April 22 global strategy report. These subdued gains are despite a valuation discount of 25% to the broad S&P 500 index, Citi said.

Also, in the U.S., the sector trades at a 30% forward price-to-earnings ratio discount to the S&P 500, the bank said.

Some of the relative drag on the sector could be related to worries about potential regulation. Proposals mentioned since the Democratic primaries have included regulation of drug prices and an overhaul of the U.S. insurance system, Bailin says.

But, he adds, “talk about actual legislation so far includes increased subsidies to fund long-term care as well as enhancements to the Affordable Care Act subsidy regime—not cutbacks.” There’s also no call for healthcare reform.

“Given that we see the Biden proposal as a ceiling, not a floor, to what can actually be passed in the current Congress, we view the odds of major healthcare regulation that would constrict the growth of healthcare revenues as lower than what the market is currently pricing,” Bailin says.

The reason to tilt to healthcare is to gain exposure to global growth, exposure to stocks with high dividend yields, and exposure to what Citi views as an “unstoppable trend”—the demographic shift within many countries to older populations that have the money to spend on the healthcare they increasingly need.

Penta recently spoke with Bailin about where the opportunities in healthcare are.

Why Is Healthcare Undervalued?

Healthcare historically trades at a lower valuation to the market, but always at a correlated lower valuation. Since the market bottomed in March 2020, however, stocks have been driven to lofty levels by growth sectors, such as technology—a trend that stumbled on Monday as the Dow sank 500 points.

But during this period, over the last 15 months, healthcare stocks “did not inflate,” Bailin says. Their valuations remained “within a channel of normality,” yet relative to everything else, they’re “under-appreciated,” he says.

One interesting note about healthcare is that the sector hasn’t ever had a down year in revenues or earnings—even during the years of the financial crisis, 2008-09—since the late 1980s. “How much would you pay for that consistency? Right now, you’d pay a lot,” Bailin says.

Also, the bank’s strategists note in the April report that the sector has not been a bad place to be when markets slide. “Healthcare has historically fallen the least among market segments during corrections,” the report said.

Which Sectors to Focus On?

In terms of specifically where to invest, Citi wrote that “the long-term case” for spending on healthcare “rests on aging demographics, rising income levels in emerging market countries, and tremendous innovation in vaccines, gene therapy, med-tech, wearables, Alzheimer’s treatments, and much more.”

One company that will benefit from current demographic shifts, for instance, is San Diego-based Dexcom, which develops, makes, and distributes monitoring systems for diabetes.

Biotechnology and biopharmaceutical companies also should benefit, given the important role these companies play in drug discoveries and treatments.

To capture global growth—and high dividend yields—Citi recommends companies such as Chicago-based biopharmaceutical AbbVie (with a 4.5% dividend yield), and companies listed on exchanges outside the U.S., where stocks are slightly less expensive, Bailin says. An example of the latter is Paris-based multinational pharmaceutical company Sanofi, which also has a high dividend yield of 3.7%.

Citi also likes companies creating healthcare delivery systems, such as telehealth—services that allow patients to interact virtually with their health-care practitioners.

“There are a whole bunch of companies that are changing the delivery modality to moving away from the hospital and away from the office,” Bailin says. “We think this will happen with many sectors.”

Also worth a look are companies involved in medical devices, robotic surgery, or “anything that creates better decisions,” he says.

Intuitive Surgical, for example, is the leader in robotic-assisted surgeries, Bailin says. It “continues to expand into new surgical indications, and the [total addressable market] is enormous.”

In the wake of the pandemic, Bailin expects some pharmaceutical companies and companies focused on physician-administered therapies and vaccines will get a boost temporarily as people return to the doctor for the first time in more than a year.

“Instances of disease are lower, but it doesn’t mean they actually are lower—they are just not reported,” Bailin says. “We have a bunch of catch-up over the next 12-to-24 months to [get] back to baseline interaction with healthcare providers.”

New Jersey-based Merck, for instance, could benefit “given that its oncology and vaccines are a significant percentage of revenue,” he says.

What About Technology?

While the technology sector had a bad day on Tuesday as the market rotated out of growth stocks, investors may not be ready to abandon hot tech names just yet. In announcing the tactical shift higher in healthcare, Citi noted that investors who followed their recommendation would still have plenty of exposure to technology.

Investors who follow Citi’s recommended 60% allocation to global stocks as defined by the investable MSCI All Country World Index will have 12.6% of their portfolio invested in technology, according to Citi. The recommendation to increase healthcare to a 4% overweight will lead to an 11.2% exposure.

“For decades the sector has carried some modicum of political and headline risk,” Citi wrote. “But that has yet to upend an enviable record of positive revenue growth. Steady revenue growth at a deep valuation discount is the type of script we like.”

LIKE MARVEL VILLAINS, most fashion writers have origin stories. Mine began with a navy nylon Prada purse, salvaged from a Boston thrift store when I was a teen in the 1990s. Scuffed with black streaks and sagging, it was terribly beat-up. But I saw it as a golden ticket to a future, chicer self. No longer a screechy suburban theatre kid, I would revamp myself as sophisticated, arch, even aloof. The bag, I reasoned, would lead the way.

That fall, I slung it against my shoulder like a shotgun and marched into school, where a girl far more interesting than I was called out, “Hey, cool bag.” After feigning apathy —“I don’t know, you could use a Sharpie on a lunch bag and it would look the same”—we became friends. She introduced me to a former classmate who worked at a magazine. That woman helped me get an internship, which led to a job.

Twenty years later, I still wonder how big of a role that Prada purse played in my future—and whether designer bags can function as a silent partner in our success. Branded luxury bags took off in 1957, when Grace Kelly posed with an Hermès bag in Life magazine. (Hermès renamed that bag “the Kelly” in 1973.) The term “status bag” was popularised in 1990 by Gaile Robinson in the Los Angeles Times, describing any purse that projects social or economic power. Not surprisingly, these accessories are costly. Kelly bags cost over $10,000; ditto Chanel’s 11.22 handbag. Some bags by Louis Vuitton and Dior command similar price points. The cost isn’t repelling customers—both brands reported revenue surges in 2023. But isn’t there something dusty about the idea that a branded bag carries meaning along with your phone and wallet? How much status can a status bag deliver in 2024?

Quite a lot, said Daniel Langer, a business professor at Pepperdine University and the CEO of Équité, a Swiss luxury consulting firm. Beginning in 2007, Langer showed a series of photo portraits to hundreds of people across Europe, Asia and the U.S., then asked them 60 questions. Those pictured carrying a luxury handbag were seen as “more attractive, more intelligent, more interesting,” he said. The conclusion was “so ridiculous” to Langer that he repeated the studies several times over the next decade and a half. The results were always the same: “Purchasing a ‘status bag’ will prepare you to be more successful in your social actions. That is the data.”

Intrigued, I gathered various Very Important Purses—I borrowed some from friends, and others from brands—to see if they could elevate my station with the same unspoken oomph as a “Pride and Prejudice” suitor.

First, I took Alaïa’s Le Teckel bag—a narrow purse resembling an elegant flute case and carried by actress Margot Robbie—to New York’s Carlyle Hotel on a Saturday night. The line for the famous Bemelmans Bar stretched to the fire exit. “Can I get a table right away?” I asked the host, holding out my bag like a passport before an international flight. “It’s very busy,” he said in hushed tones. “But come sit. A table should open soon.” I sank into one of the Carlyle’s lush red sofas and sipped a martini while waiting—a much nicer way to kill 30 minutes than slumped against a lobby wall.

Wondering if this was a one-time thing, I called up Desta, the mononymous “culture director” (read: gatekeeper) who has worked for Manhattan celebrity hide-outs like Chapel Bar and Boom, the Standard Hotel bar that hosts the Met Gala’s official after party. “Sure, we pay attention to bags,” he said. “Not too long ago at Veronika,” the Park Avenue restaurant where Desta also steered the social ship, “we had one table left. A woman had a Saint Laurent bag from the Hedi Era,” he said, referencing Hedi Slimane , the brand’s revered designer from 2012 to 2016. “I said, ‘Give her the table. She appreciates style. She’ll appreciate this place.’”

Some say a status bag can open professional doors, too. Cleo Capital founder Sarah Kunst, who lives between San Francisco and London, notes that in private-equity circles, these accessories can act as a quick head-nod in introductory situations. Kunst says that especially as a Black woman, she found a designer bag to be “almost like armour” at the beginning of her career. “You put it on, and if you’re walking into a work event or a happy hour where you need to network, it can help you fit in immediately.” She cites Chanel flap bags made from the brand’s signature quilted leather and stamped with a double-C logo as an industry favourite. “People love to talk about them. They’ll say, ‘Ohhh, I love your bag,’ in a low voice.” They talk to you, said Kunst, “like you’re a tiger.”

For high-stakes jobs that rely on commissions—sports agents or sales reps, for instance—a fancy handbag can help establish credibility. “It says, ‘I’m succeeding at my job,’” said Mary Bonnet, vice president of the Oppenheim Group, the California real-estate firm at the centre of Netflix reality show “Selling Sunset.” As a new real-estate agent in her 20s, Bonnet brought a fake designer bag to a meeting. To her horror, a potential buyer had the real thing. “I work in an industry where trust is important, and there I was being inauthentic. That was a real lesson.” Now Bonnet rotates several (real) Saint Laurent and Chanel bags, but notes that a super-expensive purse could alienate some clients. “I don’t think I’d walk into [some client homes] with a giant Hermès bag.”

Hermès bags are supposedly the apex predator of purses. But I didn’t feel invincible when I strapped a Kelly bag around my chest like a pebbled-leather ammo belt. The dun-brown purse cost $11,800, a sum that prompted my boyfriend to ask if I needed a bodyguard. Shaking with “is this insured?” anxiety, I walked into a showing for an $8.5 million apartment steps from Central Park. I made it through the door but was soon stopped by a gruff real-estate agent asking if I had an appointment. No, but I had an Hermès bag? Alas, it wasn’t enough. The gleaming black door closed in my face.

“What went wrong?” I asked Dafna Goor, a London Business School professor who studies the psychology behind luxury purchases. “You felt nervous,” she replied. “That always makes others uncomfortable, especially in a high stakes situation,” like an open house with jittery agents. Goor said recognisable bags from Louis Vuitton and Christian Dior are also often faked, which can lead to suspicion if not paired with “other signals of wealth.”

“You can’t just treat a bag as a backstage pass,” said Jess Graves, who runs the shopping Substack the Love List. Graves says bags are more of a secret code shared between potential connections. “I’ve been in line for coffee and a woman will see my Margaux [from the Row] and go, ‘Oh, I know that bag.’ Then we’ll chat.” Graves moved from Atlanta to Manhattan in 2023, and says she’s made some new, local friends thanks to these “bag chats.”

I had my own bag chat that night, when I brought Khaite’s Olivia—a slim crescent of shiny maroon leather—to a house party thrown by a rock star I’d never met. In fact I knew hardly any guests, but as I stood in the kitchen, a woman in vintage Chanel pointed to my bag and asked, “How did you get that colour? It’s sold out!” Before I could tell her my name, she told me the make and model of my purse. Then she laughed about her ex-boss, a tech billionaire, and encouraged me to buy some cryptocurrency. The token I picked surged nearly 30% in about a week. Now I was onto something—a status bag that might bring not just status, but an actual market return.

Thanks to their prominence on social media, certain bags have gained favour among Gen Zers. “TikTok and Instagram make some luxury items even more visible and more desirable to young people,” said Goor. I experienced this firsthand on a stormy Saturday morning, when a girl in a college hoodie pointed at my Miu Miu Wander bag as I puddle-hopped through downtown New York. The piglet-pink purse is a TikTok favourite seen on young stars like Sydney Sweeney and Hailey Bieber. “Your bag is everything!” yelled the girl from the crosswalk. “Thanks, can I have your umbrella?” I shouted back. She laughed and left. My Wander had made a splash—but it couldn’t keep me dry. I ran to the subway, soaked. The bag looked even better wet.

Changing the Status Bag Quo

Everyone loves an ingénue—fashion insiders included. Perhaps that’s why at Paris Fashion Week in September, newer handbags from Bottega Veneta and Loewe jostled for space and street-style flashbulbs.

“These bags, especially ones by independent labels like Khaite, are quieter signals of cultural access,” explained Goor. “Everyone knows what an Hermès Kelly bag is. So now there need to be new signals” beyond traditional status bags to convey power.

Sasha Bikoff Cooper, a Manhattan interior designer, says there’s a less cynical explanation for why these bags have captured celebrity fans—and more important, paying customers. “They’re fresh and also beautiful,” she said. “Hermès is always classic. It’s like a first love. But you want newness, too.”

The Wall Street Journal is not compensated by retailers listed in its articles as outlets for products. Listed retailers frequently are not the sole retail outlets.

Future Returns: Opportunity in Global Healthcare

Strategists at Citi believe the sector is inexpensive and worth a look.

Some designer handbags like the Hermès Kelly have implied power. But can a purse alone really get you a restaurant table—or even a job?

Changing the Status Bag Quo