The companies best placed to deliver cost-effective healthcare in the world are the US HMOs as they have been crunching the data for years. These stocks trade on quite modest valuations, given their long records of high shareholder returns and ability to withstand political squeezes.
This is undoubtedly due to the current US election where presidential candidates often promise to bring down insurance premiums in order to attract votes from the seniors.
The growth in diagnostics is a following wind for Thermo Fisher, Danaher, Agilent, Mettler Toledo and others, complemented by academic and primary research and development investment globally. A core theme in my view. There are likely to be further coronavirus outbreaks in future, so testing stocks are worth stacking up now.
Drug stocks have generally not performed well in recent years. Part of the reason is that they did too good a job curing very prevalent diseases and, when these patents expired, ran out of growth. Generally, I would be underweight this group and looking to take small holdings in early stage potential blockbusters.
Orthopaedics demand is increasing globally, mainly from emerging markets – but can the manufacturers price for these markets?
Maybe, given the oligopoly, one might break ranks on pricing to win a big presence in China/India, but that could kill the industry margin. People already fly to Turkey for dentistry, will people fly to India for a new hip?
Conclusion
The healthcare needs of our ageing population gives a tailwind to a broad range of stocks. However, the irresistible force of demographics is met by the immovable rock of affordability.
Companies that help public health provision become more efficient are numerous and the best are world-class innovators in pharmaceuticals, scientific equipment or data processing. It seems sensible to give the group a sizeable allocation in any long-term investment portfolio.
From an investment perspective, healthcare can broadly be divided in to early-stage companies that may have a product, and later-stage, long-established businesses that have an array of established products on the market.
A key determinant of the performance of those assets is the interest rate cycle, as higher rates usually lead to periods where market participants view assets that will generate the bulk of returns in future less favourably, while focusing on assets that generate strong returns today.
That benefits the more defensive, large-cap healthcare stocks.
Conversely, if interest rates are falling, investors tend to attach a higher value to assets that will generate the bulk of their returns in future, which tends to benefit the healthcare companies that are early stage.
On the basis that timing such shifts in market sentiment is very difficult – bordering on the impossible – when one is constructing a global equity portfolio, it is probably best not to try to take that task on.
