The demands, impacts and changing shape of healthcare with a dose of investment ideas
Resuscitating your investment portfolio
Healthcare plays an important part in any economy and it is well-known that an economy with healthy, fit workers is a productive economy. Below I take a cursory look at the demands, impacts and changing shape of healthcare and highlight some investment ideas that have exposure to this sector.
Healthcare comprises of many different industries and includes health insurers, devices, equipment manufactures, pharmaceuticals, bio-technology and hospitals, as well as other healthcare facilities. As with all businesses healthcare is affected by negative and positive underlying drivers. Positive drivers include but are not limited to; people living longer, a rise in chronic conditions such as diabetes, spread of viruses in a globalised society such as Ebola or Zika viruses and advances in technology helping to drive costs down while adding efficiencies. Negative factors that can impact healthcare investment tend to be regulatory uncertainty and the potential squeeze on government budgets.
The healthcare model is evolving too. Previously the model focused on treating acute illnesses, while in more recent times the model has centred around the patient. The new focus is on disease prevention and the ongoing management of chronic diseases and conditions with a move towards more personalised health treatments.
Throughout the world, spending on healthcare is largely controlled by governments. Therefore sales are very much dependent on government healthcare budgets and being able to win contracts with governments or regional healthcare authorities.
When it comes to investing in healthcare most options available to UK investors are globally exposed funds with the majority of exposure weighted towards the US. As the market leader in the healthcare sector generally, it has a dominant technology market and is highly liquid. The US spends approximately 16% of GDP on healthcare, followed by Switzerland spending c.11%, Netherlands spending c.11% and Norway spending c.9%.
Healthcare is generally considered a defensive sector for investment. However, through technological change, aging populations in a number of global markets, a greater consumption of healthcare products and services, in recent years it has been exhibiting more growth characteristics. In addition, certain modern day health problems, such as diabetes and obesity are presenting investment opportunities. Consumers are also becoming more affluent and healthcare more affordable privately and accessible particularly in emerging economies.
It is anticipated that demand is on the rise for healthcare products and services with global healthcare spending projected to reach $8.7trillion by 2020. Outside of the US, which accounts for 44% of the global market, China continues to expand its national healthcare system. Social security spending on healthcare is estimated to rise over 50% in Japan as the country struggles to cope with the challenge of an ageing population. As economies recover from the effects of low global commodity prices, Russia and other countries in Latin America and the Middle East will be reassessing funding for healthcare.
After the election of Donald Trump in 2016, healthcare decoupled and started to lag the returns of a composite world market index, underpinned by the President’s state of the union address where he made reference to drug pricing. Volatility in the sector has since been fuelled by rhetoric around the Affordable Care Act (ACA or Obamacare).
The impact has seen more attractive valuations for the sector with a forward P/E of around 16 times compared to the long run average of around 22 times.
Additionally, healthcare companies’ balance sheets remain solid and flush with cash. They offer attractive dividend yields and increasing the possibility more of share-enhancing buy-backs and mergers and acquisitions we have already seen. The benefit of Trump’s tax reform seems to be exceeding expectations in healthcare too with lower corporate rates, tax repatriation and incentives to boost capital expenditure.
Predictions that the Federal Reserve (FED) will raise interest rates three times in 2018 bodes well too, with the sector outperforming during FED hiking cycles on average since 1970.
Below is a selection of funds, ETFs and investment trusts that have exposure to the healthcare sector that we believe present some great opportunities for gaining exposure to this part of the market.
Woodford Patient Capital Trust
While this is not a healthcare investment trust per se it has a significant exposure to early stage healthcare opportunities, which represent about 68% of the holdings.
Exchange Traded Fund (ETF)
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