Investors tend to have deeply engrained beliefs about what performs best in various market conditions—often for good reason. But sometimes, common knowledge becomes obsolete. Technology and healthcare are good examples of sectors that can play different equity-allocation roles than you might expect.
Typically, the information technology sector is a bellwether of bullish market sentiment. When growth stocks are in favor, technology blue chips have historically offered up supersized returns, albeit with volatility and downside risk to match.
Technology’s reputation as an offensive juggernaut with a shaky defense is in part due to the FAANG (Facebook, Apple, Amazon, Netflix and Google) stocks, which have dominated tech-sector returns in recent years. But last year’s market nosedive underscored the downside of big tech shares, which badly lagged the broader market even as stocks suffered their worst performance since the global financial crisis in 2008–2009.
The FAANG phenomenon, paired with the rise and fall of unprofitable tech firms, has left the impression that technology stocks play poor defense. What do we mean by this? Traditionally defensive shares may not offer the same growth potential but have less downside capture—meaning, they fall less than the market in downturns. Along with utilities and consumer staples, healthcare has long been considered one of the most reliably defensive sectors, providing an important buffer when markets turn sour. That’s because demand for medical care is relatively inelastic. Hospitals, pharmaceutical firms, medical-device manufacturers and medical insurers can generate solid revenue regardless of economic fluctuations.
Technology: Going on the Defensive
But the conventional wisdom around offense and defense is beginning to shift.
Within technology, FAANGs may be the divas—glamorous but temperamental—and unprofitable tech firms haven’t done the sector any favors. Still, there are many high-quality, profitable technology companies that operate behind the scenes with none of the sturm und drang of the big stars. These are the computer hardware manufacturers, payment services firms, cloud computing providers and chip makers that serve as the backbone of the information-based economy and permeate our daily lives. While not showy, these reliable stalwarts have sustainable business models and large, recurring revenue streams.
Owing to their ability to cushion against big price swings, these higher-quality technology enablers outperformed the information technology sector as a whole in 2022. That’s due in part to their lower sensitivity to the broader market—their lower beta—than the big tech names. In fact, roughly one-quarter of the MSCI World Index technology stocks have a beta of less than 1.0, putting them in the same universe as traditionally defensive stocks (Display).