Against that uninspiring backdrop, investors are rightly questioning where they can find reliable and sustainable growth.

It’s the combination of reliability, or defensiveness, and growth that is the challenge because in most cases one comes at the expense of the other. Sectors like tobacco and utilities might offer predictability of earnings but they are pretty dull. Growth on the other hand tends to come highly correlated to the economic cycle so it can be a bit too exciting at times.

One investment theme which appears to offer the best of both worlds is demographic change. If you analyse the companies whose earnings have grown steadily through the ups and downs of the global economic cycle over the past ten years or so, many share a focus on one of three key demographic themes – population growth, ageing and the emergence of a middle class in the developing world.

Within that overarching theme, one sector in particular leaps out as a source of long-term earnings growth in excess of current market expectations – healthcare.

Scale and scope
The global healthcare industry is vast and growing rapidly. The areas it covers include drug companies, medical equipment providers, health insurers and hospitals. Investing in healthcare can seem daunting, but it’s a sector that investors should not ignore.

Figures from Bain, the management consultant, suggest that overall spending on healthcare could rise from $6 trillion in 2010 to $10 trillion in 2020.

The US accounts for 40 percent of current global spending and already spends more than $5,000 per capita each year. Even so spending on healthcare in America is forecast to grow at nearly 5 percent a year this decade.

Elsewhere, the growth potential is even greater. Starting from a low base of around $600 per capita in the world outside the US, spending is forecast to grow at rates of up to 15 percent a year in the developing world. In many economies, healthcare spending is growing much faster than the GDP. 

We can expect healthcare to account for a larger share of global GDP in future, supporting the case for a structural allocation to the sector.

Powerful long-term secular drivers
There are three key drivers of this growth. First, the world is ageing, fast.  Falling birth rates and longer life expectancy in developed countries mean populations are greying more than ever before, which increases the incidence of age related diseases such as many cancers, heart disease and Alzheimer’s.

Endologix, a heart disease specialist, has been doubling sales for the past five years and, with only 10 percent of the US market in its focus area of aortic aneurysms, it has plenty of scope for further rapid expansion, especially in Europe.

Hilary Natoff, joint Portfolio Manager of the Fidelity Global Demographics Fund, highlighted two companies standing to benefit from this growth driver: “There is also increased demand for general and specialist healthcare services. New Zealand company, Ryman Healthcare, which runs retirement villages, has a solid self-funding model which should provide a runway for growth as it prepares to expand in Australia. Meanwhile, Invocare, Australia’s largest funeral and crematorium operator, stands to benefit from the accelerating death rate in Australia (from 1% to 2.7%*), the trend towards more elaborate funerals and its growing market share in New Zealand and Singapore.”

Nicky Stafford, joint Portfolio Manager of the Fidelity Global Demographics Fund, summarised: “While the inescapable trend of global population ageing is creating some serious political headaches for national governments, it can also give rise to some attractive opportunities for both businesses and investors.”

Second, sedentary lifestyles are causing growth in a wide range of chronic diseases. In cities, deteriorating air quality has also led to an rise in respiratory illness. As waistlines expand along with greater consumption of protein, dairy and sugar, so too do the incidences of diabetes. A major beneficiary is Novo Nordisk, a global leader in insulin production with a 50 percent share of the fast-absorbing variety.

Third, demand for better healthcare is growing quickly in emerging markets as incomes increase and life expectancy rises. Many emerging markets are planning large-scale programmes to improve domestic healthcare.  China, for example, launched a $125 billion nationwide stimulus package in 2009. 

The aim is to cover 90 percent of its 1.3 billion population.  China’s pharmaceuticals market was already the eight largest in the world in 2006 and is predicted to be the third biggest by the end of this year. With an increasing middle class in many emerging markets, the private healthcare industry is thriving.  Apollo Hospitals, the world’s largest private hospital operator, has plans to expand the number of its sites in India by over 50 percent in the next five years.

Nick Price, Emerging Equities Portfolio Manager, says: “The developing world is a happy hunting ground for healthcare opportunities over the long-term.  With rapid population growth, rising incomes, natural inflation environments, underserved markets and strong government interest in supporting the populace, emerging market marketing in healthcare is set to grow from strength to strength.”

Investment considerations
One of the reasons why healthcare is so interesting to investors, apart from the scale of its growth, is the diversity of the sector. That means it can appeal to different styles of investor, with big, cash-rich pharmaceuticals companies offering secure dividends, mid-sized healthcare companies offering growth prospects and bio-tech start-ups offering high risk, high return potential and the chance of a takeover. Big pharmaceutical companies routinely use acquisitions to fill in products or skills where they don’t have the right expertise. Corporate activity is an interesting feature within the healthcare sector.

Many of the sub-sectors within healthcare march to very different beats which makes it easier to smooth returns while different parts of the supply chain from manufacturing to marketing, distribution and customer-facing service provision will be in favour at different points in the cycle.

Big companies might fare better in a downturn while small-caps offer growth when markets are rising fast.  While some healthcare stocks can offer defensive properties, they should be seen as more than a simplistic defensive play. On a relative basis the sector is less sensitive to the economic cycle than others, which means it offers good defensive qualities and more predictable earnings in times of market volatility. However, it can also offer tremendous growth potential. This is true even among mature large-cap companies.

There aren’t many things certain in today’s world but population growth and ageing are two about which we need have no doubts. The expansion of the emerging world’s middle class looks unstoppable too and the combination of all three means that increasing demand for healthcare is as close to a given as investors can hope for – however dreary the IMF’s outlook.

* Source: Invocare website February 2013

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity Worldwide Investment.

Prior to making an investment decision, retail investors should seek advice from their financial advisers. This document has been prepared without taking into account your objectives, financial situation or needs.  You should consider these matters before acting on the information.  You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise.

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