Perfect economic conditions for healthcare to thrive

 

Wealthy individual investors are bullish on healthcare stocks, but professional investment managers are split on whether the local sharemarket alone has sufficient diversity for those seeking portfolio exposure to the sector.

A survey of 400 sophisticated and wholesale investors by Citi in February found 46 per cent believe healthcare is the sector of the economy that shows “most promise” in the year ahead. The research was limited to sole or joint financial decision-makers with more than $2.5 million in net assets or annual income exceeding $250,000.

Almost 40 per cent of respondents indicated they hold shares in the healthcare sector, although the top three sectors most heavily featured in wealthy portfolios were finance, industrials and telecommunications.

The findings reflect stronger expectations for the performance of healthcare stocks among wealthier investors than even technology stocks, the best-performing sector in 2020.

Peter Moussa, investment specialist at Citi Australia, says survey respondents are right to have high expectations for healthcare.

“The future looks bright for healthcare,” Moussa tells The Australian Financial Review. “Citi expects demand for healthcare products and services to remain elevated due to the pandemic.”

He suspects that many high-net-worth investors are attracted to the sector partly because of the valuations on offer – especially compared to the technology sector, where market capitalisations, in 2020 at least, were being compared to the late 1990s “dotcom boom” (which preceded a bust).

“Healthcare stocks are relatively cheap in what is a broadly expensive market,” Moussa says.

“Overall the healthcare sector has lower volatility because of more predictable revenue streams. This is particularly true of stocks that have strong balance sheets.”

The market analyst’s comments relate to healthcare exposures on the Australian sharemarket.

While the investors surveyed were not asked to differentiate their expectations between local and global markets, 52 per cent said they limited their share portfolios to Australian companies, while 44 per cent held both local and international shares.

 

CSL heavily tipped

Jun Bei Liu, portfolio manager at Tribeca Investment Partners, believes there is plenty of opportunity for healthcare sector bulls exclusively hunting on the Australian sharemarket.

“We have very innovative companies in the Australian healthcare sector,” Ms Liu says.

Naturally, she points first to CSL, Australia’s largest healthcare company and among the top three companies in general, with a market capitalisation of $131.6 billion as at June 1.

The biotech giant, known for being the world’s largest collector of human blood plasma, has seen its shares surge by 145 per cent over the past five years. Having presided over the remarkable growth, its chief executive, Paul Perreault, was named Financial Review Business Person of the Year in 2019.

More recently, its shares have “underperformed”, Liu says, having declined by about 3 per cent over the past six months. But it remains “very interesting” and “one of the country’s greatest businesses”, she adds.

Equity analysts at Macquarie have an “outperform” rating on CSL, projecting its shares will rise by 8 per cent over the next 12 months off the back of increased foot traffic at its US-based blood collection centres.

Morgan Stanley analysts Sean Laaman and Megan Kirby-Lewis, however, tip CSL as likely to have a “strong rebound” in the 2023 financial year but faces uncertainty until then.

 

Other contenders

Given its size and global brand recognition, CSL can dominate conversation of Australian healthcare, Liu concedes. After all, it accounts for about 6.5 per cent of the S&P/ASX 200 index – let alone the S&P/ASX 200 Health Care Index.

But she says there are many other Australian healthcare companies batting above their weight, including in international markets.

Medical imaging company Pro Medicus, for example, was until recently considered a “small cap”. However, it is growing by the day, Liu says, partly due to its success abroad.

“There is lots of momentum behind this business,” she says. “It has incredible technology,” she adds, and is inking deals with “premium hospitals” around the world.

 

People are generally more health conscious and there is a baby boom on the cards as well.

— Jun Bei Liu, Tribeca Investment Partners

 

In January Pro Medicus secured its largest-ever contract, locking in a seven-year deal with Salt Lake City-based US healthcare group Intermountain worth $40 million.

Similarly, Ramsay Health Care has made moves abroad, forking out $1.8 billion to acquire British competitor Spire Healthcare in May.

“To me, that is really exciting because the UK is a market where private health insurance penetration is very, very low,” Liu says. “Ramsay have a lot of property sitting on the balance sheet that they could unlock” to deploy to similar growth opportunities, she said.

The private hospital owner and operator, founded by late Rich Lister Paul Ramsay in 1964, also looks relatively “cheap”, Liu adds, trading about 20 per cent below its five-year peak of $79.75 in February 2020.

It also has a good outlook for earnings growth as it emerges from the pandemic. To that end, Ramsay is a company that “plays in the COVID-19 reopening theme”, Liu says.

With private medical facilities shut and elective procedures cancelled for much of the past year, it has been a “pandemic loser” and is poised for a comeback as normal conditions resume.

That is not to say that the healthcare sector’s pandemic winners, such as New Zealand-based and Australian-listed Fisher & Paykel, will necessarily become losers, however.

Having experienced relatively slow traction selling its products into hospital emergency rooms around the world in recent years, the surging demand for its respiratory devices during the pandemic bodes well.

“The pandemic has actually brought forward the decision to adopt their products,” Liu says.

 

Global spectrum

More broadly, the sector is well-positioned to benefit from cultural changes and trends accelerated by the pandemic. “People are generally more health conscious and there is a baby boom on the cards as well,” Liu says.

Citi’s Moussa agrees. “In the longer term, [healthcare] revenues are further supported from changes in demographics such as the ageing population.”

However, Arian Neiron, managing director of exchange traded fund manager VanEck in the Asia-Pacific, questions whether healthcare investors can truly get exposure to the reopening theme and other positive trends without going global.

“You would want access to a diversity of segment and global names across the entire healthcare spectrum including, but not limited to, pharmaceutical, biotech, hospital/nursing management and other medical specialties,” he says.

For that reason, VanEck has not considered an ETF that tracks the Australian healthcare index. “It is way too concentrated across names and sub-segments,” Neiron says. “CSL would be over 60 per cent and also there are only 13 constituents.”

 

This article was originally posted on The Australian Financial Review here.

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