This week’s update comes from Richard Allen who is in our discretionary management team in Peterborough.
As we begin to approach the half year mark, markets are overall showing some pretty respectable gains on the back of a strong “value” led rally and a surge in economic activity as the world begins to “normalise”. The rotation into “value” and economically exposed businesses presently appears well supported. However, with the temporary lull in markets the opportunity exists to revisit an old friend, healthcare.
From a performance perspective, the healthcare sector has lagged broader markets for quite some time and this is even more pronounced when some of the more speculative names are stripped out of the headline numbers. At the moment healthcare appears to be stuck in the doldrums. The reason for this malaise centres upon the well-voiced concerns over the future policy direction of the Biden administration and in particular the thorny issue of drug pricing. Investors though appear to have overlooked increasing positive signs that the sector has returned to normality following a year of Covid-19 disruption. In turn this has allowed a valuation gap to emerge between many companies in the sector and wider markets. In the near term, Covid-19 is likely to lead to demands for improvement to public medical and social care provision. In many countries the healthcare sector is likely to take on “national” importance as we recover from the pandemic. Due to this government policy around the world is likely to be much more friendly towards healthcare companies which have the knowledge and resources to combat the big issues facing society, which in many ways is “just what the doctor ordered”. That’s not to say there aren’t risks in the sector as government policy can change and politicians have a nasty habit of over regulating.
Healthcare plays into one of our core long term themes, changing demographics, and it is worthwhile revisiting the compelling statistics on this. In the developed world we are all generally living longer, lead more active lives and at the same time we are witnessing a demographic shift as populations age. The United Nations has forecast that by 2050, a quarter of the population of Europe and North America will be aged 65 or over. Older populations are likely to spend much more on healthcare as their bodies age and medical care is needed to maintain their wellbeing. In the UK alone 50% of over 65s are on five or more drugs for medical ailments.
But it’s not just demographics which are leading to structural change. Over the last two decades we have seen a significant reduction in the percentage of the global population living in poverty. At the same time this has been coupled with a significant increase in the world’s middle class and urbanisation particularly in Asia. Consumption of healthcare is likely to see significant growth in this region. The healthcare sector presents the opportunity to invest in a diverse range of companies that are at the forefront of innovation be that in vaccines, cancer and diabetes drugs, to joint replacements and wound care. There is also a strong role for companies operating in wellness and for those which develop products or tools to help people live healthier, happier lives.
Returning to financial markets and the week ahead will provide us with another update on the US inflation picture, with the release of consumer price inflation (CPI) data. At the moment investors seem to be buying into the narrative that a jump in CPI is more to do with congestion and temporary supply issues in the global economy.