The healthcare sector has been a reliable safe haven during even the most challenging markets. But the novel coronavirus panic is raising questions about its resilience. By looking beyond the pandemic at changes sweeping the industry, investors can find defensive healthcare stocks that offer long-term growth prospects, too.

Healthcare stocks outperformed all sectors in the first quarter. In the MSCI World Index, the healthcare sector fell by 10.8%, while the benchmark dropped by 20.1% in local-currency terms (Display, left). With the worst-performing sectors such as financials and energy falling by 30.2% and 43.0%, respectively, healthcare stood out as a relatively solid sector for uncertain times. Our analysis shows that healthcare industries posted better relative performance versus the MSCI World during the recent downturn than in previous market crises (Display, right).

Conditions Deteriorating as COVID-19 Spreads

Despite its top relative performance, the healthcare industry is facing challenges. In particular, thousands of medical offices that aren’t directly serving virus-related needs have been shuttered, from general practitioners, family clinics and veterinarians to other medical outlets.

Large medical facilities and networks are hard hit, too. This is because they’ve deferred elective surgeries, chronic illness treatments, orthopedics and other services, which generate most of their revenues, to handle COVID-19 patients. Trauma-related surgeries have also fallen sharply, because fewer people are driving, riding bikes, playing sports or even walking outdoors due to stay-home orders around the world. We think hospitals may struggle for some time, even with massive stimulus coming their way, such as at least $100 billion in CARES Act money in the US.

Drug companies aren’t immune either. Answering the global call for virus treatments and a vaccine, big pharma has tapped the brakes on other medical research in their pipelines.

It’s a mixed bag, but all healthcare companies share one dire characteristic: none is even trying to guess what its forward earnings will be as far out as six months. Yet despite the cloudy outlook, we believe that any demand destruction from the crisis won’t be permanent for most companies in the healthcare sector.