Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Eurozone Healthcare Stocks Are Defying the Slowdown
Transcript
- Lucas: We talk a lot on this show about the parts of the Eurozone economy that are struggling — manufacturing, construction, exports losing pricing power. But there is one sector that is quietly delivering consistent returns through all of it, and it's not tech. It's healthcare. Luna: Healthcare stocks in Europe have been on a steady climb this year, and it's not just the big pharma names. The broader healthcare index, including medical devices and services, has outperformed the STOXX Europe 600 by a noticeable margin. Lucas: Right. And that's interesting because the macro backdrop is not exactly friendly. Wholesale prices in the Eurozone unexpectedly declined in June, headline CPI came in below expectations, and we've got the ECB dealing with renewed Hormuz hostilities that could push energy prices back up. Yet healthcare is just humming along. Luna: So what's driving that? Is it just defensive rotation — investors fleeing cyclical sectors — or is there something structural here? Lucas: I think it's both, but the structural story is stronger than people give it credit for. The Eurozone has an aging population — the median age in Germany is now over 47, in Italy it's 48. That creates a baseline demand for healthcare services and products that is almost completely independent of the economic cycle. Luna: Demographics are destiny, as they say. But we've known about aging for years. Why is the market pricing it in now? Lucas: Because the cyclical alternatives keep getting worse. Look at manufacturing PMIs — they've been in contraction or barely positive for months. Construction output is soft. Exporters are losing pricing power to Chinese competitors. So fund managers who need exposure to Europe are rotating into the one sector where earnings visibility is actually high. Lucas: And it shows in the numbers. The Eurozone healthcare sector's earnings per share growth has been running at about eight to ten percent annually, while the broader market is struggling to hit four. That kind of differential draws capital. Luna: Which sub-sectors are leading? Is it pharma, or more the device and diagnostic companies? Lucas: Medical devices and diagnostics have actually been the strongest. Companies like EssilorLuxottica, which is eyewear and lens technology, or Siemens Healthineers, which makes imaging equipment — they have pricing power because their products are often non-discretionary. If you need an MRI, you're not going to wait for interest rates to come down. Luna: And there's also the private-label effect we talked about in episode 112. Consumers are trading down in groceries and clothing, but healthcare spending is sticky. You don't skip your prescription refill because inflation is high. Lucas: Exactly. That's the key difference. Healthcare has a built-in demand floor. And from an investor perspective, it also offers something rare in today's Eurozone: pricing power. The wholesale price index for medical goods has actually been rising, while overall wholesale prices declined 0.3 percent in June. Luna: So the sector is benefiting from both volume growth — aging population — and price growth. That's a powerful combination. Lucas: It is. And it's also relatively insulated from the trade shocks that are hitting manufacturing. Medical devices are often produced locally or within the EU, so the tariff and supply-chain disruptions that are hammering auto exporters don't apply as much. Luna: But there is a geopolitical angle. The renewed Hormuz hostilities and the potential for energy price spikes — does that hit healthcare? I mean, hospitals and labs use a lot of energy. Lucas: It's a cost headwind, yes, but not a demand killer. Healthcare providers can pass on some of those costs through contracts, and utilities are a relatively small part of their total expense base. Compare that to a chemical plant or a steel mill, and it's night and day. Luna: So if you're an investor looking for Eurozone exposure today, healthcare looks like one of the few safe harbors. But is there a risk of it getting overbought? Lucas: Valuations are certainly not cheap anymore. The forward price to earnings ratio for the Eurozone healthcare sector is around 18, which is above its five-year average of 16. But it's not extreme. And given the earnings momentum, it might be justified. Lucas: The bigger risk is probably regulatory. We've seen the EU push for more price controls on pharmaceuticals, especially in Germany and France. If that accelerates, it could compress margins for the pharma sub-sector specifically. Luna: But devices and diagnostics might be less exposed to that, since they're more technology-driven and less about drug pricing. Lucas: Exactly. And that's where a lot of the capital is flowing. Companies like Sartorius, which makes lab equipment for biopharma research, have seen their order books grow even as the broader economy softens. It's a play on long-term R&D spending, not on the next quarter's GDP. Luna: This is actually a useful lens for thinking about the Eurozone economy more broadly. The narrative has been so negative — trade surplus masking weakness, construction in decline — but there are pockets of genuine strength. Healthcare is one. Maybe also the digital infrastructure we talked about a few episodes back. Lucas: Right. And that's why we do this show — to find those pockets. And honestly, if walking through the economy with us has made something click for you, whether it's understanding why wholesale inflation matters or why healthcare is defying the slowdown, there's a simple way to help us keep making this content. Luna: We don't run ads, and that's a choice. It means the show is funded entirely by listeners who find value in it. A small group of people already chip in monthly through Buy Me a Coffee dot com slash fexingo, and that's literally what pays for the research and production. Lucas: No pressure ever. But if you've gotten something out of this episode or the back catalog, and you want to see more episodes like this, that's the place. It's Buy Me a Coffee dot com slash fexingo. And we mean it — every contribution, no matter how small, makes a difference. Luna: Yeah. And now back to the numbers. Lucas, you mentioned that the Eurozone healthcare ETF, which tracks the sector, has been up around 0.8 percent over the past five days, while broader European ETFs are flat to slightly negative. What does that tell us about near-term sentiment? Lucas: It tells me that the rotation is still in its early to middle innings. Typically, defensive sectors outperform in the late cycle, and we may be entering that phase for Europe. The ECB is navigating a very volatile outlook — Hormuz, sticky services inflation, weak growth — and that uncertainty favors sectors with predictable earnings. Luna: And if the ECB does have to rethink its rate path because of energy shocks, that could actually help healthcare further, since lower rates would reduce the discount rate applied to future earnings, making growth stocks more valuable. But healthcare is not really a growth sector — it's a quality sector. Lucas: Right. It's a quality compounder. And in an environment where GDP growth is at 2.1 percent annualized, but real growth is actually quite low because of inflation, finding sectors that can grow earnings in real terms is rare. Healthcare does that. Luna: So for the listener who wants to look into this further, what should they watch? Any specific indicators or companies? Lucas: I'd watch the earnings reports from the big device companies over the next few weeks. If they guide higher, it will confirm the trend. Also keep an eye on the German healthcare PMI, which has been holding above 50 while manufacturing has been below. That divergence is a signal. Lucas: And for individual names, Fresenius and Siemens Healthineers are good bellwethers for the hospital and diagnostic space. If they're seeing volume growth, the demographic thesis is playing out. Luna: Alright. So next time someone says the Eurozone economy is all doom and gloom, we can point to healthcare as a counterexample. A sector that's quietly compounding, year in and year out. Lucas: Exactly. And that's the kind of story we like to dig into. Thanks for listening.