The ‘diversification trade’ is increasingly gaining momentum. While AI and technology stocks have dominated the headlines, concerns over stretched valuations and speculative investments are prompting investors to consider diversifying their portfolio. With low valuations, structural growth drivers and a wave of innovation, healthcare may be the natural complement to tech.
For the past few years, healthcare has lagged broader markets, weighed down by policy uncertainty and investor caution. Today, however, the backdrop looks very different. Relative valuations are compelling, fundamentals remain robust and several catalysts suggest the sector could be at an inflection point.
Valuations at multi-year lows
Healthcare has been significantly out-of-favour and its relative valuation has dropped to multi-decade lows. The MSCI World Healthcare index rose just 7.5% over the year to 31 October, compared with 20.2% for the MSCI World index.
Forward price-to-earnings ratios sit at 16.8x versus 20.6x for the broader market – a 30% discount and the widest gap since the 1980s. Small and mid-cap valuations are particularly attractive, offering entry points not seen in decades. Meanwhile, the breadth of positive earnings revisions has been trending upwards since early 2025 – historically a leading indicator of recovery.
Attractive valuations and rising earnings have not gone unnoticed by corporate buyers. M&A activity is accelerating, with major deals such as Novartis acquiring Avidity Bioscience for $11bn (£8.3bn) and Johnson & Johnson announcing a $14.6bn purchase of Intra-Cellular Therapies.
“Structural trends such as ageing populations, emerging market demand and relentless innovation are converging with improving policy clarity to create a favourable backdrop for long-term investors.
Historically, healthcare performs better in the second year of a US presidential term, when policy risks recede.”
Other transactions include Telus Health’s $500m acquisition of Workplace Options and EssilorLuxottica’s move into AI-driven ophthalmology platforms. This renewed M&A momentum underscores confidence in the sector’s long-term growth prospects.
A key headwind in recent times for the healthcare sector has been the uncertainty around US drug-pricing and tariffs – however, recent developments suggest these clouds are lifting. Agreements between the US government and major pharmaceutical companies such as AstraZeneca and Pfizer are looking to introduce ‘most favoured nation’ pricing frameworks for Medicaid and other eligible US citizens in return for a three-year grace period on tariffs (under Section 232).
These deals should help to provide visibility and reduce regulatory risk – conditions that typically support higher multiples. Historically, healthcare performs better in the second year of a US presidential term, when policy risks recede. With these headwinds clearing, the backdrop for healthcare looks increasingly supportive.
Demographics and demand
Beyond short-term catalysts, healthcare benefits from powerful structural drivers. Populations in developed markets are ageing rapidly, driving the higher use of healthcare services and sustained demand for treatments targeting chronic conditions such as cardiovascular disease, diabetes and neurodegenerative disorders.
This surge in activity is amplified by the clearing of pandemic-era waiting lists, which is releasing pent-up demand across hospitals and clinics. In the UK alone, Alzheimer’s cases are forecast to rise from one million today to 1.4 million by 2040. Both of these add to the workloads in an already stretched healthcare system. Similar patterns are evident globally, underpinning long-term growth for pharmaceuticals, medical devices and services.
Emerging markets add another layer of opportunity. Rising incomes and expanding middle classes are increasing access to branded drugs and advanced medical technologies. This shift is not just about volume – it is about the adoption of higher-value therapies and devices, creating attractive revenue streams for companies with global reach.
China’s total health expenditure as a percentage of GDP has already increased from 5.22% to 7.05%, exceeding the World Health Organisation’s recommendation for medium-to-low-income countries. As per-capita wealth grows, demand for both public and private healthcare services will accelerate, creating a long runway for growth.
Innovation at the core
Healthcare remains one of the most innovation-driven sectors. Over 2025, at the time of writing, the US Food and Drug Administration has approved 38 novel drugs, including breakthroughs in oncology, cardiovascular disease and rare disorders.
The obesity drug market, led by GLP-1 therapies, is a great example of the scale of opportunity, with analysts forecasting annual spending on obesity medicines could exceed $100bn by 2030. Companies such as Eli Lilly and Novo Nordisk are racing to develop next-generation formulations, including oral alternatives to injections, to capture this growth. Cancer remains the main area for innovation, with nearly a dozen approvals so far this year, including four for lung cancer.
At the same time, advances in technology – particularly in AI, telehealth and personalised medicine – are transforming patient care and improving outcomes. Robotic surgery systems, atrial fibrillation ablation devices and wearable monitors are reshaping treatment pathways. These innovations are not only improving outcomes but also expanding addressable markets, reinforcing the sector’s long-term growth profile.
Capturing the opportunity
Ultimately, healthcare’s fundamentals remain robust and valuations are relatively attractive. Structural trends such as ageing populations, emerging market demand and relentless innovation are converging with improving policy clarity to create a favourable backdrop for long-term investors.
Diversification across market caps and subsectors is key, with emphasis on companies exposed to secular growth drivers and innovation cycles. For those willing to look beyond short-term noise, the sector offers a rich opportunity. For investors wanting to ensure their portfolio is diversified, healthcare may be the smart complement to tech – positioned not just for recovery but for long-term outperformance.
James Douglas is co-manager of Polar Capital Global Healthcare Trust
