In focus

What are the long-term prospects for healthcare investing post Covid-19?


The Covid-19 crisis has hurt most economic sectors this year. As of 30 June, healthcare was one of only three sectors to post positive year-to-date returns (1.3% compared to -5.8% for the MSCI World index). Some healthcare companies have seen activity fall amid cancelled surgical procedures and non-essential appointments. However, companies making the equipment used to treat Covid-19 patients have seen orders rise sharply.

Meanwhile, hopes for a return to “normal” are ultimately pinned on finding a vaccine or treatment. There are over 100 potential vaccines in development and existing treatments for other conditions are being trialled to see if they may be effective against the virus.

All of the above points to an enormous amount of resource being dedicated to combatting Covid-19, with many healthcare companies benefiting through higher orders, sales, and investment.     

Three factors supporting the sector

Global equities fund manager, John Bowler concurs that healthcare will persist as a key investment theme beyond the Covid-19 crisis. He sees three forces that could make healthcare a sustainable growth area for many years to come: demographics, efficiency, and technology.

1. Demographics

The demographic challenge is clear across developed countries. The leading edge of the baby boomer population is hitting 75. This is the age when more complex procedures like hip replacements occur, driving an acceleration in healthcare demand.

2. Efficiency

John says “The financial burden to national budgets and employer-sponsored health insurance is creating the necessary force for change.

Pressure on government budgets due to the Covid-19 economic crisis reinforces the importance of this theme. Chief Economist and Strategist, Keith Wade says “Healthcare spending already accounts for nearly one-fifth of OECD public expenditure. This will present a challenge to finance ministries at a time when the International Monetary Fund forecasts that total government debt will rise to 150% of GDP for the G20 by the end of 2021, largely as a result of Covid-19.”

And it’s not just governments who are looking to get more for their money, as Schroder Adveq’s Jeremy Knox says: “Pharmaceutical companies are looking to the next frontiers of medicine, all the while seeking to be more efficient in drug development to maximise returns on new therapies. This search for efficiency has led to a robust market for outsourced service providers. These form an integral part of the value chain for drug development.”

3. Technology

John Bowler says “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.”

Combination of factors to support growth in sector

This suggests that quite apart from Covid-19, there are a number of dynamics that could support ongoing growth and activity in the healthcare space. Demographic change and the need to make health services more resilient to future crises will drive sustained growing demand for healthcare services. Budget pressures make investing in efficiency enhancing technology a necessity not an option. The possibilities opened up by new technology are vast, from new treatments to new methods of accessing healthcare. And then there are the new markets opening up as growth in emerging market economies enables more people to access healthcare services.

Such ongoing demand could potentially see some companies achieve consistently higher growth in future. This may make them attractive to investors seeking higher returns. As ever, selecting the right companies to invest in will be crucial.

 

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