Beyond the jab

While the COVID-19 vaccines have spurred a wave of market exuberance, pushing up share prices of some healthcare companies that were at the forefront of the vaccine race, the overall performance of the healthcare sector has underperformed broader equity markets so far in 2021.

However, the healthcare sector will continue to experience tailwinds due to shifting global demographics including ageing populations, the prevalence of chronic diseases and healthcare reform to address future global pandemics. Rising healthcare spending in both emerging and developed markets will also drive the growth of the sector. Health expenditure is expected to outpace GDP growth over the next 15 years in almost every OECD country and health spending will reach 10.2% of GDP by 2030, up from 8.8% in 2018. Over that time, healthcare spending is expected to reach US$14 trillion per year by 2030 (OECD, Health at a Glance 2019). Despite these tailwinds, Australian investors are underweight healthcare because the local sector is relatively small, dominated by one company, CSL, and it is also relatively expensive.

The COVID-19 crisis has again put healthcare front and centre

Another wave of COVID is hitting many parts of the world. NSW and Victoria are in lockdown, Indonesia is on the brink, riots are breaking out in South Africa and the virus is spiking among unvaccinated Britons and Americans. This all highlights the case for strengthening public health systems. We think, especially because many emerging markets such as China have to play ‘catch-up’ to developed nations on their healthcare spending, this will represent one of the biggest reallocations of capital resources in generations.

During the pandemic in 2020 and 2021, testing and public health surveillance infrastructure has been the most powerful tool mitigating the spread of COVID-19. However, as we have witnessed, disparity between the best systems and those that need investment is stark. The COVID-19 pandemic is a major inflection point in health technology. Rapid-health screening and infectious-disease testing is a new multi-billion-dollar industry in the making and the beneficiaries are likely to be those companies that have existing capabilities.

Beyond the jab

Healthcare companies continue to tackle other health problems facing the population, with the aim of providing solutions for a range of issues. For example, Hikma Pharmaceuticals recently received approval for a nasal spray to reverse the effects of opioid overdose. According to its release, “drug overdose, including most commonly opioid overdose, has been described as the ‘leading cause of accidental death’ in the US today – a situation that has been exacerbated by the COVID-19 pandemic.”

Drug administrators around the world continue to assess and approve new drugs. At the same time, governments continue to allocate expenditure to improving healthcare as part of stimulation packages. Other long-term trends driving rising global expenditure in healthcare include the combination of global population growth and ageing demographics. Except for a few large ‘young’ countries such as India and Indonesia, ageing demographics is a global phenomenon. The increasing prevalence of chronic diseases will also continue to drive up the demand for healthcare and investment in the sector. People with chronic conditions and diseases are intensive users of health services, and their costs of care tend to be much higher. Finally, we are also witnessing rising healthcare expenditures of the fastest growing economies to match demand and better provide for their citizens.

Access global healthcare opportunities

Despite these long-term tailwinds, Australian investors are generally underweight healthcare stocks relative to international benchmarks. The local sector is relatively small and dominated by CSL. It is also expensive (see the chart below).

Therefore, an allocation to global healthcare is an important diversifier. While to date, access to a global opportunity has been limited, ETFs are now providing access to a portfolio of global healthcare companies via one trade on ASX.