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06 Oct 2021

The rising star of Healthcare and how you can invest

By Mahjabeen Zaman, senior investment specialist for Citi There are few silver linings to a pandemic, but one is more medical breakthroughs will come to help improve our lives. It has also heightened awareness of the opportunity in this vital industry.

In times of global events like war and pandemics medicine takes a leap ahead. Unfortunately, tragedy can have benefits for our health. The research to create a vaccine for COVID-19 and the work undertaken to provide treatments will undoubtedly lead to new breakthroughs in medicine, care and delivery systems, and it has also reignited interest in the sector for investors.

The healthcare sector has a large weight in both the US Markets and the ASX. Healthcare is the S&P 500’s second largest sector weight standing at 13 per cent, and third largest for the ASX 200 at 11 per cent. 

Despite our knowledge of aging demographics and the breakthroughs medicine regularly makes to improve the length and quality of our lives, valuations when we started our overweight stance on the healthcare sector at the start of the year were at multi-decade lows. Year-to-date the sector has risen 17 per cent, in line with global equity returns, but it has outperformed by 6 per cent since the beginning of June, according to Bloomberg data.

With a relatively low valuation, healthcare also outgrows the economy over time, with aging global demographics, income growth and technology all poised to drive the sector to long-term gains

Healthcare as a sector presents defensive characteristics during times of market stress. Over the past 25 years, the sector has shown resilience during moderate equity market corrections.

Health sectors association with the overall market during during negative market events

 
Source:Citi Research July 2021

The three key drivers we expect to provide an ongoing growth outlook for health.

1) Aging population:

  • The world is facing an unprecedented demographic shift. As of 2019, the global population aged over 65 stood at 703 million, or one in every eleven people. By 2050, this is set to have more than doubled to 1.5 billion, or one in every six people. The “very senior” cohort – those aged over 80 – is likely to increase even more rapidly, from 143 million to 426 million. This pattern is the result of many decades of improved life expectancy and declining fertility.
  • This profound demographic change will mean many more cases of chronic and life-threatening diseases. We therefore describe increasing human longevity as an unstoppable trend, a powerful long-term force that is transforming the world around us.
  • Meeting the healthcare needs of many more elderly people will be a particularly pressing priority worldwide. Currently, more than three quarters of those aged 65 and over have at least two chronic conditions. Spending on healthcare in developed nations for someone aged over 85 can be as much as six times greater than for a 59-year old. 
  • Development of new treatments for chronic and life-threatening conditions will involve pharmaceutical and biotechnology companies of all sizes, public and private.

2) Speed of innovation

  • The intense challenges of the worst pandemic in a century have demanded ingenuity and adaptability throughout the economy and society. Until now, no vaccine had ever been developed, tested, and approved in under five years. After COVID-19’s identification in January 2020, the first vaccines were approved and deployed within eleven months. Today, at least eight of these vaccines are in use globally. We believe this experience could accelerate innovation in healthcare for decades to come. 
  • Ongoing breakthroughs arising from completion of the mapping of the human genome in 2003.

3) Increasing research and development funding

  • Investment across the industry is another key driver of progress. In aggregate, large pharmaceutical companies have boosted research and development expenditure around 10-fold over the past 20 years. They spend an average 25% of their total revenues in the search for new drugs to address serious illnesses.
  • The past year has also prompted other advances in care delivery. Faced with lockdowns and social distancing measures, providers have accelerated their adoption of innovative technology, such as telemedicine.
  • We expect the trend towards remote diagnosis and treatment to persist after the pandemic ends, given the efficiency and convenience gains on offer. The same is true of medical technology. For example, wearable devices could play an increasing role in monitoring individuals’ health going forward.

 

The healthcare opportunity

The biotech industry and healthcare technology providers have played a pivotal role in the fightback against COVID-19. We believe their experiences will transform the development and testing of new products.

Even companies that have fallen short in developing COVID-19 treatments and vaccines have gained valuable knowledge. This encompasses much more than research into infectious diseases. Development efforts around conditions including cardiovascular disorders, Alzheimer’s, cancer, and genetic disorders could also benefit.

We see many possibilities for gaining exposure to potential healthcare advances over the coming years. These include some of the largest, quality enterprises, which pay high and growing dividends.

The window of opportunity

A refocus on the sector is already occurring. In the years ahead, the world will depend even more – and spend more – on healthcare than at any time in history. As well as spurring progress, COVID-19 has highlighted inequalities in access to healthcare worldwide.

To address this, we expect governments to work more closely with providers. For investors, we believe that exposure to these trends offers both long-term growth potential and a way to enhance human wellbeing.

Wealth Solutions  >

 

This document is distributed in Australia by Citigroup Pty Limited ABN 88 004 325 080, AFSL No. 238098, Australian credit licence 238098. Any advice is general advice only. It was prepared without taking into account your objectives, financial situation, or needs. Before acting on this advice you should consider if it's appropriate for your particular circumstances. You should also obtain and consider the relevant Product Disclosure Statement and terms and conditions before you make a decision about any financial product, and consider if it’s suitable for your objectives, financial situation, or needs. Investors are advised to obtain independent legal, financial, and taxation advice prior to investing. Past performance is not an indicator of future performance.

 

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