Q&A: Could now be the time to invest in healthcare?

The Covid-19 pandemic and the extreme lockdown measures taken in many countries have exacted a heavy toll on equity markets. However, during this volatile period the healthcare sector has been a relative safe haven. It continues to deliver growth ahead of the wider economy, driven by demographic trends (such as the ageing population in many countries) and advances in medical science.

However, it’s the rapid pace of change across the sector that makes investing in healthcare most compelling.

John Bowler, a fund manager specialising in healthcare innovation, answers our questions on what the sector can offer investors.

What are the advantages of investing in the healthcare sector?

"The healthcare sector has traditionally provided investors with a source of relatively defensive growth. In other words, exposure to companies that deliver profits growth above that of the broader economy with less sensitivity to the economic cycle than some other high-growth areas of the market such as IT, communication services and industrials.

"Many investors see these as attractive characteristics, which can be explained in part by the breadth and diversity that exists within the sector.

"An example of this breadth can be clearly seen in "med tech", a sub-set of the broader healthcare sector. The med tech sector encompasses a diverse range of product and service companies providing the industry with everything from bandages and syringes to diagnostic equipment and imaging technologies, in aggregate supplying more than 500,000 products and services to the industry. This small subset offers investors the potential to invest in an array of companies with very different return and growth profiles."

What factors are driving the healthcare sector?

"There are three forces that will make healthcare a sustainable growth area for many years to come. The first factor is demographics. Increasing numbers of older people around the world is driving an accelerating demand for healthcare services. In the US, for example, the oldest members of the so-called baby boomer generation are approaching 75, an age that sees peak utilisation of services such as hip replacements, hearing aids and other conditions of ageing.

"The second factor is efficiency. The financial burden to national budgets and employer-sponsored health insurance is creating the necessary force for change. For example, in the US 30[(-40) was not found] of healthcare spending is regarded as wasted, which creates a tremendous opportunity to drive efficiency.

"The final critical factor is technology. There is a steady stream of novel and disruptive technologies in both medicines and technology/data that are providing new approaches to managing diseases. These are providing better patient outcomes in a more cost effective manner. The current Covid-19 crisis has just shone a large spotlight on the importance of these technologies. However, it’s the pace of rapid change across the sector that is now the most compelling reason for investors to consider the sector as this presents the potential to achieve outsized share price returns."

So, how is the sector performing in the current climate?

"Whilst the overall MSCI World Healthcare index has fared much better than overall markets, there has been a marked divergence in performance. The main impact of the Covid-19 policy measures has been to stop most surgical procedures in hospitals and cancel the majority of non-essential patient visits to doctors and dentists.

"As a consequence, companies exposed to this - providers (for example, hospital companies) and their suppliers (such as medical equipment companies) - have fallen precipitously. In contrast, the large pharmaceutical companies have been relative safe havens as patients globally have still been able to get their prescriptions filled and critical cancer therapy has had minimal disruption."

Which areas of healthcare offer the best growth potential?

"The outbreak of Covid-19 has clearly demonstrated how important technology is for the healthcare sector. In particular, telehealth, which refers to the distribution of healthcare-related services via electronic devices such as mobile phones and laptops, offers significant potential for growth.

"Patients are now experiencing the benefit and convenience of online consultations with doctors, and healthcare providers are also realising the benefits as they replace lost income from cancelled face-to-face consultations with virtual consultations. The speed at which the virus has spread globally also highlights the need for novel approaches to vaccine/medicine treatments to combat such new diseases."

Is now a good time to invest in the healthcare sector?

"It is a really exciting time to be investing in healthcare. We are at the start of a transformational shift in knowledge and technology. The advancement of medical science in recent years has seen an unprecedented shift in the power of diagnostics, product development and personalised therapies.

"Medical technologies are contributing to more effective procedures and better treatments, while digital health will serve to democratise the management of healthcare and well-being, providing individuals with the tools and data to take greater responsibility for their own personal health.

"While these changes have been some time in the making, we are now at a positive inflection point where we will start to see genuine innovation and advancement across the sector. This will drive the returns of those companies at the forefront of innovation. This can be seen by a number of new, innovative drugs in areas such as oncology and gene therapy that are at the point of commercialisation."

You can find more Insights article here: https://www.schroders.com/de/ch/asset-management/insights/

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