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

Companies making the equipment used to treat Covid-19 patients have seen orders rise sharply, whilst testing and diagnostic specialists have also seen a hugely increased demand for Covid-19 testing that offset the decline in tests for other illnesses. Meanwhile, hopes for a return to “normal” are ultimately pinned on finding a vaccine or treatment.

Schroders’ Chief Economist, Keith Wade and Equities Fund Managers, Paul Griffin and John Bowler discuss why, even if a vaccine is not found, there is still a strong argument that the sector is on the cusp of a period of rising demand, innovation, and potentially higher growth.

Keith Wade, Schroders Chief Economist and Strategist comments:

“In my report “Inescapable truths” I identified the changing demographics and the consequent need for increased health spending as a key trend that will shape the investment landscape in coming decades. In my view, the Covid-19 pandemic has “super-charged” this theme.

“We would expect spending on health to rise as governments build more resilience into their health systems. Just as the banking sector had to increase buffers against risk after the global financial crisis, the health sector will be expected to do the same after the pandemic.

“The crisis has put a spotlight on countries whose health services have appeared ill-prepared. Difficulties sourcing appropriate ventilators, or sufficient quantities of tests, have been high-profile news. A sustained higher level of health spending is therefore something that a number of Schroders fund managers expect as well.”

European equities fund manager Paul Griffin comments:

“Even once the worst of the current crisis has passed, we think demand is likely to remain robust.

“The pandemic has focused attention on the importance of being prepared. As such, we would expect that companies producing life-saving equipment and drugs will continue to see elevated demand relative to the pre-crisis period.”

“Biologics, for example, is a “fast-growing niche” in the healthcare sector. Biologic drugs range from simple proteins to complex antibodies manufactured in living organisms. Such drugs have been around for the past decade but are of increasing importance in offering safe, innovative medicines with higher success rates. Biotech companies increasingly outsource biologic development and manufacturing to specialist companies. As a result many of these ’pick and shovel’ companies are enjoying strong growth in the biologics market.”

Three factors supporting the sector

There are three forces that could make healthcare a sustainable growth area for many years to come, beyond the Covid-19 crisis: demographics, efficiency, and technology.

John Bowler, Fund Manager and Global Equities Specialist, comments:

“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.

“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.

“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.

 “There is a steady stream of novel and disruptive technologies in both medicines and technology/data that are providing new approaches to managing diseases.”

Combination of factors to support growth in the sector

Paul Griffin concludes:

“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.

“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. These businesses are not simply defensive places to hide during a crisis; they offer opportunities for long-term growth.”