Investing in healthcare

February 2019

Opportunities in an aging population

By Peter Moussa

The global bull market is nine years old and is undoubtedly mature, yet we believe it will continue through 2019 and expect modest single digit gains by year end for the S&P 500 Index. Key drivers include continued US economic growth, and its Federal Reserve indicating reduced pressure to keep hiking interest rates.

However, political risks still loom large as trade tensions, Italian political uncertainties and Brexit discussions continue, even as economic fundamentals appear strong. These risks will continue to fuel volatility. This means investors should be selective in choosing their opportunities.

An area where we see strong prospects is healthcare, which in the past six months has strongly outperformed the broader market as it suffered through waves of economic, trade and politically induced volatility. We see this sector being sheltered from geopolitical risks, including trade tariff talks. It is also a sector that can grow from modern technology.

Source: Bloomberg, Healthcare sector (Black) vs S&P500 (orange) since start of year

New challenges, New opportunities

Around the globe, there are almost a billion people aged 60 and above – up from 0.5b in 1990. We expect this figure to double by 2050. The ‘very senior’ population, the number of over- 80s, is projected to more than triple, concentrated in developed nations. Healthcare companies will not need to wait until 2050 to profit from this trend. Today baby boomers are already citing the importance of good health as the most important ingredient for a happy retirement – this is rated as more important than ‘financial security’ and ‘having loving family and friends’.

The worlds aging population presents a major challenge for society and an opportunity to invest in the businesses that profit from these changes, such as pharmaceuticals, senior living facilities and sectors that contribute to increasing lifespans and extending quality of life in advanced age.

Retirees have accumulated a lifetime of savings, and with a growing amount of economic output likely to be devoted to treating and supporting the elderly, we see growth potential for healthcare, both medical and services, as well as housing and other forms of support.

Companies that develop innovative treatments for some of old age’s most prevalent illnesses may offer attractive prospects. Aside from drugs, medical devices will likely see greater demand as populations continue to age. These include replacement hips, knees, and other orthopaedic fittings. We also expect the surgical procedures associated with these and other treatments to be increasingly carried out with the assistance of robots. Both companies specialising in medical devices and medical robotics may thus have solid growth potential.

Economic uncertainty has helped healthcare

Health care is a non-cyclical sector as healthcare needs are relatively consistent despite economic uncertainty. This is why we tend to see flow into these sectors during times of uncertainty. Given that our focus for clients is capital preservation to counteract risk we look to diversify adequately especially for clients who are over concentrated on domestic equities, hedge when appropriate, and invest with a margin of safety by focusing on value.

Investment Opportunities:

There are many touchpoints for investors to get an exposure to the healthcare sector, with two of the primary being direct equities and income-based solutions. We like and specialise in the latter, as it offers a cost effective hedge to take advantage of recent market volatility. These unique positions can provide investors with a positive return in rising, flat or moderately falling markets.

Peter is an investment specialist for Citi

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