Tisco Bank's wealth advisory unit suggests moving away from energy stocks to biotechnology and healthcare as several US economic indicators have signalled a higher risk of recession.
Tisco said energy stocks tend to fall during an economic recession because there will be less demand for energy and oil. According to Tisco's research, energy stocks have decreased by around 75% on average during past economic crises.
Nattakrit Laotaweesap, head of wealth advisory at Tisco Bank, said the Federal Reserve's 75-basis-point rate hike at its June meeting signalled more aggressive rate hikes are to come.
The Fed is expected to raise the benchmark interest rate to 3.25-3.50% by the end of this year. This is a rapid pace and will result in a dramatic decrease of liquidity in the global financial markets, he said.
In addition, the US consumer confidence index fell to 98.7 in June, the lowest level since 2013, as businesses are cutting workforce in line with declining future demand for goods.
The grim prospects for the job market have heightened the chance of an economic recession in the future, said Mr Nattakrit.
He said if the US economy enters a recession as expected, the earnings per share of stocks in the S&P 500 Index could shrink by 25.5%, especially stocks whose earnings fluctuate in line with economic conditions, such as the energy sector, where oil prices decline when there is shrinking demand.
According to Bloomberg, the group earnings of energy stocks reduced by 75.5% on average during the last four economic crises, comprising the dot-com bubble, the subprime mortgage crisis, the oil crash and the Covid-19 pandemic.
Mr Nattakrit said the only sector that saw growth during recessions was healthcare. Historical data shows healthcare profits continue to grow well over the long term, outperforming the overall S&P 500 Index.
According to data from Bloomberg, over the past 30 years, S&P 500-listed companies have recorded average earnings growth of 6.9% per year, while the healthcare sector recorded a 10.2% gain.
The advisory said biotechnology is another sector with high potential for growth.
According to Grand View Research, the biotechnology sector will see a compound annual growth rate (CAGR) of 13.9% from 2022 to 2030, while digital healthcare will record a CAGR of 27.7%.
To capture gains from the growing trends, Tisco recommends investors sell energy stocks and move to healthcare firms whose profits have strong potential to grow well in the long term, even if a recession occurs, as demographic shifts are pushing many countries to become "ageing societies".
Healthcare products and services are also necessities that should continue to see an increase in demand, said Tisco.
According to the US Centers for Medicare and Medicaid Services, the proportion of US healthcare spending will remain high at 19.6% of GDP throughout 2030, rising to US$6.7 trillion by 2028.
Many large pharmaceutical companies are reportedly looking to acquire small- and medium-sized drug companies. The larger drug companies will cause the shares of these smaller firms to increase by leaps and bounds, according to Tisco.
Multinational biotech and drug giant Pfizer recently announced its acquisition of Biohaven, the innovator of "Nurtec ODT", a therapeutic and prophylactic drug for migraines, for $11.6 billion in cash. The purchase caused Biohaven's share price to spike 70% on the day the agreement was announced.
