Sidestep economic risk with these market sectors

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The Canadian equity market is dominated by banking and resource stocks, making household debt levels and global economic growth the biggest investment risks for domestic investors.

There may not be a Canadian credit or housing crisis. But consumer debt is at record levels with little room for expansion, which threatens bank profits due to limited credit growth and consumption, and the bloated housing and mortgage markets.

In terms of the global economy which drives commodity prices, recent signs are not encouraging. China is slowing and the consensus estimates for U.S. and European gross domestic product growth are being slashed.

So should Canadians sell their stocks and hide the proceeds in a mattress? Hardly. An investment in secular growth themes – those benefiting from trends that will continue with little regard for global growth or domestic balance sheets – can generate returns while sidestepping these risks.

There are few guarantees in life but here's one – developed world populations will age in the coming decade and as a result, health care spending will increase. In Canada, for instance, a study by the Canadian Institute of Actuaries designed "to directly capture the increasing health care costs associated with Canada's aging population" predicted that, with current levels of federal support, health care costs will rise from 44 per cent of provincial budgets to 97 per cent in 25 years.

The trend of higher spending on health care is clear throughout the developed world and there are a host of health care-related sectors that will benefit as a result. These include pharmaceuticals (Roche Holding AG , Pfizer Inc.), biotechnology (Celgene Corp., Gilead Sciences Inc.), medical equipment (Stryker Corp.) and U.S. hospitals (HCA Holdings Inc., Universal Health Services Inc.). As public finances across the globe become stretched, health care technology companies that increase the efficiency of health care delivery are also likely to benefit tremendously.

Cloud computing is another trend that appears almost inevitable. Corporate spending on cloud computing infrastructure is not completely immune from the global economy – it will depend on profit growth (which is widely sensitive to economic expansion) to some extent. But, the potential cost savings involved with moving to the cloud should support investment even in a slow growth environment.

An exhaustive study by Cisco Systems Inc. forecasts that mobile cloud traffic will increase 12 fold between now and 2018, a compound annual growth rate of 64 per cent. Like health care, there are a host of technology sub-industries poised to benefit. These include hosting services (Amazon.com Inc., Rackspace Hosting Inc.), virtualization (F5 Networks Inc., VMware Inc.), software (Red Hat Inc., Salesforce.com Inc.) and social media (LinkedIn Corp.).

Investors need to be aware that while health care and cloud-related investments help minimize economic risk, this does not mean the stocks are risk-free. Valuation risk, particularly in the cloud sector where Amazon trades at almost 900 times earnings (not a typo) and VMware sports a trailing price earnings ratio of 44 times, remains an issue. Health care stocks are more reasonably valued but regulatory risk, government price controls and similar possibilities, are the primary cause for concern.

In both cases, however, these sectors are enjoying strong tailwinds that make the odds of index-beating profit growth much higher than for the market as a whole. If investors are diligent, patient and careful in their investment selection – this may include exchange-traded funds such as iShares Nasdaq Biotechnology ETF (IBB) and First Trust ISE Cloud Computing Index Fund (SKYY) to provide diversification – significant investment returns should be available while dodging much of the risk associated with a global economic slowdown.