The healthcare sector has undergone significant growth in the past few years, with countries across ...
The healthcare sector has undergone significant growth in the past few years, with countries across the world spending increasing amounts of money on health services.
With very few exceptions, all 190 countries surveyed by the World Health Organisation have increased their spending on healthcare since the beginning of the new millennium. Countries such as the UK, France and Germany spend about 10% of their annual GDP on healthcare, while the US leads the way with a massive 15% of annual GDP.
And realistically, as populations age and unhealthy lifestyles take their toll, this spending is undoubtedly set to rise further. Importantly, in times of economic uncertainty, the sector tends to be more resilient than others at withstanding a slowdown.
The fortunes of businesses in the healthcare sector aren't dependent on the good health of the economy (no pun intended) in order to do well. The sector is more affected by government policy and regulation than a simple slowdown in consumer spending.
The healthcare sector today consists of a varied collection of drug and medical equipment developers, manufacturers, wholesalers, retailers, as well as insurers, private hospitals and nursing homes.
Many of the most interesting opportunities are to be found in the small-cap and mid-cap part of the market (companies worth £1bn or less). There are lots of new companies coming to the market with niche products, whether they be in medical devices or in diagnostics.
Moving up the market cap ladder to large-cap pharmaceuticals, unexploited opportunities are harder to come by, with most factors (loss of patent protection, lack of innovation) affecting the business largely factored into share prices. However, this is the part of the market which is the most able to outperform during bearish markets. These stocks trade at considerable discounts to other defensive sectors with arguably better visibility of earnings over the next 12 months.
In the coming months, demand for drugs and related services is far less likely to be affected by the economic downturn than the demand for the latest flat-screen TVs and designer goods.
- Long-term healthcare spending is set to increase;
- Healthcare is a defensive sector that is less dependent on economic trends;
- However, politics can be a big influence on the sector's fortunes.
- John Bowler, manager, Schroder Medical Discovery fund.
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