Wealth Outlook 2024 - Slow then grow

63 Wealth Outlook 2024 | Opportunistic Our top 10 high conviction potential opportunities FIGURE 9 S&P pharmaceuticals total return vs S&P healthcare equipment S&P 500: Pharmaceuticals (Total Return Index) S&P 500: Healthcare equipment (Total Return Index) 4,000 2,800 1,600 2,200 0 1,100 2016 2020 2021 2022 2023 2024 Source: Haver Analytics through November 22, 2023. All forecasts are expressions of opinion and are subject to change without notice and are not intended to be a guarantee of future events. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary. 5. Medical technology & tools companies Healthcare, a sector for which ever-rising medical spending typically lifts most boats, saw one of its widest performance dispersions in recent memory this year. While a handful of large companies with blockbuster new drugs (see For investors, healthcare innovation is on sale on page 92 ) experienced explosive share gains, many others struggled. Loss-making early-stage biotech firms straining under rising financing costs, insurers facing new US regulatory headwinds, pandemic vaccine makers and teledoc providers were among the subsectors that fell out of favor. But the performance of another category makes no sense to us. With the advancement of AI, the methods for drug discovery and testing are about to accelerate and become more productive. Think of AI-enabled drug research as Healthcare’s answer to the semiconductor equipment makers. After valuations had gotten rich during the low-rate, peak- COVID medtech euphoria of a couple years ago, the abrupt switch to fast-rising discount rates led many companies to suffer severe share price declines that have overshot the mark, in our view ( FIGURE 9 ). As credit costs stabilize over the coming two years and regulatory changes force more best-selling drugs off patent, we expect merger and acquisition activity to pick up as pharma and larger biotechs acquire small earlier-stage firms with promising candidates to replenish the larger firms’ pipelines. This should lead to the next leg in the biotech innovation investment supercycle. We also believe that cheaply valued tech and tools could be among the broadest beneficiaries.