19 June 2019
Demand for healthcare services and medications are set to increase in China amid a growing middle class and swelling ranks of the elderly. Photo: CNSA
Demand for healthcare services and medications are set to increase in China amid a growing middle class and swelling ranks of the elderly. Photo: CNSA

Why healthcare stocks can outperform in the long run

US healthcare stocks are one of my favorites all the time, in particular those from the biotech segment.

The biotech index has soared to 3,906.45 from 937.65 in 2007, equivalent to an annualized return of around 30 percent. The segment has outperformed the one-fold jump in the technology index, as well as other industrial and regional benchmarks.

Now, why has the healthcare sector outperformed?

A key reason is an aging population and growing instances of diseases occurring at younger age. For example, some people have to take medication at a relatively young age for diseases like high blood pressure, high cholesterol and high blood sugar.

This has boosted demand for drugs, and led to short supply in various medicines. The list included 44 central nervous system drugs, 41 antimicrobials drugs, 34 electrolytes and nutrition drugs, 28 cardiovascular drugs and 19 chemotherapy drugs.

The supply shortage was caused by a combination of production constraints, excessive demand and raw materials factors, as well as some business decisions.

With the problems, the hospitalization cost for 20 common diseases in hospitals in the United States has surged by 62 percent in the last year and 183 percent in the last six months. Former US President Bill Clinton had pledged to cap the medicine cost growth before taking office, but the promise wasn’t kept.

Against this backdrop, US healthcare stocks have outperformed for quite a long time, and even held up well during the financial crisis.

Now, coming to China, the nation’s one-child policy has worsened the issue of aging population. Demand for healthcare services and medications are also set to increase due to the rapidly expanding middle class and household wealth. 

As an economic slowdown affects various sectors, in particular high-growth industries like financials, property and manufacturing, healthcare plays can offer a shelter.

Among the various stocks, Phoenix Healthcare Group (01515.HK) — which provides hospitalization services – is attractive, despite a relatively high P/E ratio. 

Shanghai Fosun Pharmaceutical Group (02196.HK) is another good option as it has diversified business exposure.

Investors should take advantage of the recent market correction to collect good healthcare counters.

Disclaimer: Pegasus Fund Managers Ltd., founded by Paul Pong, holds some shares of Phoenix Healthcare and Shanghai Fosun on behalf of its clients.

This article appeared in the Hong Kong Economic Journal on July 10.

Translation by Julie Zhu

[Chinese version中文版]

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Founder and Managing Director of Pegasus Fund Managers Ltd.

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