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NEW YORK, July 13 (Reuters) – Shares of US healthcare companies are gaining favor as investors bank on their ability to weather rocky economic times and the stocks look more reasonably valued than other defensive sectors.

Healthcare has been the top-performing S&P 500 sector over the past month, rising nearly 3% while the broader market has fallen modestly. The group has fallen 8.7% so far this year, less severe than the nearly 20% drop for the benchmark S&P 500 overall.

Strategists at Goldman Sachs, Morgan Stanley and BofA Global Research are among those favoring the healthcare sector, given that the companies’ businesses are expected to hold up better than others should the economy face a downturn.

“We feel like it is one of the last opportunities to play defense at a reasonable price,” said Walter Todd, chief investment officer at Greenwood Capital in South Carolina.

Greenwood is overweight healthcare stocks in its large-cap portfolios including shares of Johnson & Johnson (JNJ), Thermo Fisher Scientific (TMO) and Pfizer Inc. (PFE).

How healthcare companies are performing will become more clear in the coming days as second-quarter reports roll in, starting on Friday with UnitedHealth Group Inc. (UNH), the largest US healthcare company by market value.

Earnings in the healthcare sector – which includes large drugmakers, medical equipment companies, health insurers and biotech firms – have outperformed in recent recessionary periods. That makes them an attractive target for investors looking for assets that can weather a potential downturn, as recession worries grow amid aggressive monetary policy tightening from the Federal Reserve.

For example, while overall S&P 500 earnings fell for nine straight quarters during the Great Recession in 2007-2009, the healthcare sector posted earnings growth in those periods, according to Refinitiv IBES data.

Over the last 25 years, earnings per share for the sector have increased nearly 10% annually compared with 6.6% annual growth for the S&P 500, while producing “much more consistent annual growth relative to the broader market,” according to Eric Potoker, US healthcare equity strategist in the CIO office of UBS Global Wealth Management.

“If they have healthcare needs, that is usually one of the last places that people will ration,” Potoker said.

Healthcare also remains relatively more attractive than other so-called defensive stocks based on standard valuation metrics.

Healthcare is trading at 15.7 times forward earnings estimates against its long-term price-to-earnings average of 17.5 times, according to Refinitiv Datastream. That represents a 10% discount.

Meanwhile, other defensive sectors are trading at premiums relative to their historical valuations – with utilities .SPLRCU at a premium of over 30% and consumer staples at a 12% premium.

Unlike healthcare stocks, utilities and staples, at 19.4 times and 20.1 times, respectively, are also trading above the 16.1 times P/E ratio of the overall S&P 500.

“We find other traditionally defensive sectors, including utilities and staples, to be expensive relative to the broader market,” Tony DeSpirito, chief investment officer of US fundamental equities at BlackRock, said in his third-quarter equity outlook in which he described “an under-appreciated opportunity in healthcare stocks.”

To be sure, should investors become more upbeat about the economy, that could lead them to leave behind healthcare shares for more cyclically sensitive stocks such as financials or industrials.

Healthcare also for years has faced persistent investor concerns about regulatory changes, particularly related to potential US action to rein in prescription drug prices, which has created a cloud over the stocks.

In the coming months, Democrats in US Congress could try to pass a drug-pricing bill, and “biopharma stocks could be volatile if legislation progresses,” analysts at SVB Securities said in a note.

(Reporting by Lewis Krauskopf in New York; Editing by Ira Iosebashvili and Matthew Lewis)

July 13 (Reuters) – Asian stocks gained on Wednesday, taking back some of their recent losses, while the euro hovered just above parity against the dollar ahead of a highly anticipated US inflation report later in the global day.

MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.65%, snapping two straight days of losses, after having slumped to its lowest in two years the day before.

Taiwanese stocks led the gains, with Taiwan Semiconductor Manufacturing Corp. a regional and local index heavyweight rallying 4%, after Taiwan’s finance ministry said on Tuesday it would activate its stock stabilization fund. The market fell to a 19-month low that day.

Japan’s Nikkei .N225 was up 0.45% after losing nearly 2% the previous day.

But most moves felt insubstantial ahead of the release of US inflation data for June, which economists polled by Reuters expect to have accelerated by 8.8% on an annual basis, a 40-year peak.

A high inflation print would likely be read by the US Federal Reserve as a sign they need to continue with aggressive interest rate rises to get on top of surging prices, even if this might push the economy into recession.

The Fed increased rates by a supersized 75 basis points in its last meeting.

“Sharp weakness in oil prices in July suggests that June’s (inflation) may mark a peak, however. If so, the most dynamic phase of Fed tightening could conclude with a 75bps rate rise on 27 July,” said analysts at ANZ.

“However, our expectation is that underlying strength in core inflation and still deeply negative real policy rates means 50bps rate rises will still be appropriate after the summer.”

Underscoring the global inflation concerns, South Korea’s central bank on Wednesday raised rates by 50 basis points, the biggest increase since the bank adopted the current policy system in 1999, and New Zealand’s central bank also increased rates by the same amount.

Worries of higher rates contributing to slowing global economic growth has been a major factor in stock market declines this year, while in currency markets, the main effect has been to boost the safe-haven dollar.

The euro was at USD 1.00265 on Wednesday morning, as investors remained focused on whether it would fall below 1 US dollar for the first time since 2002.

It dropped to just a whisker away on Tuesday, falling as low as USD 1.00005.

The dollar was also firm on other peers, and its index measure against major rivals was holding solidly at 108.27.

The US benchmark 10-year yield was 2.9743%, having traded either side of 3% for the last week.

Oil prices paused their overnight declines. Brent crude was little changed at USD 99.55 a barrel with US West Texas Intermediate crude at USD 95.78.

(Reporting by Alun John; Editing by Shri Navaratnam)

NEW YORK, July 12 (Reuters) – Investors are giving the shares of dividend-paying companies a second look as they seek to buttress their portfolios against surging inflation and sharp declines in asset prices.

Often overlooked in favor of trendy growth names prior to the recent spike in consumer prices, the appeal of dividend payers has increased this year, as an aggressive Federal Reserve and inflation worries combine to batter stocks and bonds.

Bank of America and Goldman Sachs are among the banks that have lately touted dividend-paying stocks. The ProShares S&P Dividend Aristocrat ETF – which invests in companies that have increased their dividends annually for at least 25 years – has notched positive net inflows for all but one week this year, according to Lipper fund flows.

The fund is down 11.9% for the year to date, compared with a 19.3% decline in the broad S&P 500.

“We’re finding it makes more sense to focus on more stable companies with growing cash dividends that offer protection against volatility and also against inflation,” said John Mowrey, chief investment officer of NFJ Investment Group.

Proponents of dividend-paying stocks say the income helps cushion a portfolio against equity declines. At the same time, companies that look poised to increase their dividends may be a steadier source of income than bonds, which have a fixed coupon that can be eroded by rising prices.

Overall, the S&P 500 is expected to post another quarterly dividend payment record over the third quarter, driven in part by increasing payouts from energy companies, after increasing 2.3% to USD 16.63 per share in the second quarter, data from S&P Dow Jones Indices showed.

Dividend-payers were often seen as a less-than-glamorous corner of the stock market over the last decade, as low inflation, a dovish Fed and relatively stable growth favored large, tech-focused names that powered gains in the S&P 500. A decades-long bull market in bonds, meanwhile, gave fixed income investors a tailwind and drove total returns as Treasury yields fell to record lows in 2020.

Soaring inflation and tighter monetary policy, however, have made this year brutal for both asset classes. The S&P 500 marked its worst first half since 1970 and the US bond market – as measured by the Vanguard Total Bond Index fund – is down 10.3% for the year to date, on track for its worst annual performance in history.

As “cash grows more valuable amid Fed hiking, we expect dividend yield and bird-in-the-hand strategies to continue to outperform” in the second half of the year, BofA strategists wrote earlier this month.

Investors are awaiting US consumer price data on Wednesday after the previous month’s number showed inflation growing at its fastest pace in more than 40 years, prompting a jumbo rate increase from the Fed and slamming stocks.

NJF Group has recently added to positions in companies it believes are poised to continue increasing their dividends, Mowrey said. Among those are semiconductor company Microchip Technology Inc MCHP.O and biotech-focused real estate investment trust Alexandria Real Estate Equities Inc. (ARE).

OTHER STRATEGIES

Not all investors are convinced that dividends are the best source of income. Strategists at BlackRock, the world’s largest asset manager, said in a webinar on Monday that they are focusing on short-term and investment grade credit over the second half of the year, given the rising chances of a recession.

The firm cut its holdings of developed market equities in part because of concerns that investors are not pricing in the likelihood that earnings growth will continue to slow. Earnings season kicks in to higher gear this week as companies including Delta Air Lines Inc. (DAL) and JPMorgan Chase & Co. (JPM) report results.

With little end to the volatility in markets in sight, however, others are looking for stock dividends to help stabilize their portfolio returns.

The S&P 500 index pays a dividend yield of 1.52% overall, while some well-known dividend payers like materials company Amcor Plc (AMCR) – the largest weighting in the S&P 500 Dividend Aristocrats Index – pays dividend yields of 3.81%, compared with the 2.90% yield of the benchmark 10-year Treasury.

Michael Clarfeld, portfolio manager at ClearBridge Investments, has increased his position in companies such as Pioneer Natural Resources Co. (PXD).

“In a world where inflation is eroding purchasing power, dividends are a way to stay ahead,” he said.

(Reporting by David Randall in New York; Editing by Ira Iosebashvili and Matthew Lewis)

July 12 (Reuters) – Investors are bracing for a fresh slide in banking stocks, with fears of a hit from a potential recession outweighing the lure of relatively cheap valuations and a strong long-term outlook.

The S&P 500 bank index has fallen almost 25% so far this year compared with a drop of roughly 19% for the benchmark S&P 500. Investors will get more insight into the health of the sector when the country’s largest banks start reporting second quarter earnings on Thursday.

Lenders tend to profit from higher interest rates, but investors have dumped bank stocks on concerns that Federal Reserve rate hikes aimed at taming inflation will slow the economy, hurting loan growth and increasing credit losses.

“It really depends on your view of the economic outlook for 2022 and 2023,” said Mike Cronin, investment director at asset manager abrdn in Boston, noting investors are starting to price in a risk of recession.

“If you look out past a recessionary scenario into 2024, there is some real potential upside in the group. We’re cautious on the near-term but seeing value in the long-term.”

Second quarter profits at big banks are expected to fall sharply on increases in bad loan reserves, a reversal from last year when banks reduced those cushions as anticipated pandemic losses failed to materialize.

Profits will also be hurt by a slump in deals, although partially offset by a trading revenue boost from volatile markets.

One measure that investors like Cronin are monitoring is how bank share prices compare with book value – bank assets minus their liabilities. Prices are considered cheap when they are trading at or below book value, and become “more interesting” as potential investments, he said.

As of Friday, the S&P 500 bank index was valued at 1.07 times its book value, according to Refinitiv data, its lowest valuation since late 2020.

If aggressive rate hikes result in a deep recession this year or early next year, the top 20 U.S. bank stocks could potentially average as low as 65% of book value, according to RBC analysts.

Michael Arone, Chief Investment Strategist at State Street Global Advisors says bank stocks are inexpensive. But he remains wary of the sector, partly due to a potential slowdown in loan growth and the risk to profits from inflation.

“Right now, the risks outweigh the opportunities…Earnings are going to be disappointing,” said Arone. “Outlooks are going to be very cautious.”

But bank executives will be pinning their hopes on business improving later in the year, he said.

“I don’t think you’ll see much talk about that,” he said. “They’ll want to under-promise and over-deliver.”

While data on Friday showed the U.S. economy added more jobs than expected in June, it could still be on the verge of a recession. Gross domestic product contracted in the first quarter, with tepid consumer spending and manufacturing readings in the last two weeks.

‘PRETTY ATTRACTIVE’

Still, some investors are optimistic.

Manulife Investment Management portfolio manager Ryan Lentell says banks, which last month sailed through their annual stress tests, are much safer since the 2007-09 financial crisis even if a recession hurts loan growth.

“They’ve a lot less credit risks on their balance sheets. During the pandemic credit underwriting tightened even further,” said Lentell. “Banks are very well positioned to weather any slowdown.”

And since revenue is still growing, Lentell sees bank valuations as “pretty attractive.”

Currently, S&P 500 bank index stocks are trading at about 9 times earnings estimates for the next 12 months, compared with their long-term average of 12.4, according to Refinitiv data.

In comparison, the S&P 500 stocks are trading at 16 times earnings estimates, making banking stocks cheaper in comparison.

With a potential recession on the horizon, Kingsview Investment Management portfolio manager Paul Nolte sees risks of more volatility for bank stocks, but like Cronin says the sector looks attractive over the long term.

“There’s some downsides still, but the upside is much greater than the downside again if your time horizon is five years as opposed to three to five weeks,” said Nolte.

(Reporting By Sinéad Carew, additional reporting by David Henry and Lewis Krauskopf; editing by Michelle Price and Deepa Babington)