Healthcare rally here to stay, says Swiss & Global’s Nathalie Flury

Nathalie Flury, manager of the JB Health Opportunities Fund at Swiss & Global Asset Management sees reasons why the rally in healthcare is set to remain a trend.

Over the last three years healthcare has been the best-performing sector in the MSCI World, rising by +79% and outperforming the index by 36 percentage points. This outperformance is particularly impressive when considered against the backdrop of ultra-easy monetary policy that would typically lure investors into cyclical sectors. We believe this performance is more than a short-lived rally: it is a turnaround in the sector’s fortunes which is underpinned by demographics, emerging markets and a new product cycle fuelled by innovation. The re-rating of the sector is gaining momentum, driven by improving earnings visibility.

Key drivers for healthcare stocks include:

• Emerging markets: driven by population growth, increasing wealth, changes in lifestyle and expansion of healthcare infrastructure.

• Ageing population: people are increasingly willing to spend on healthcare to live longer and have a better quality of life. Life expectancy has almost doubled in 160 years, and is expected to increase by another five-seven years by 2060.

• Innovation: Product launches and new industries such as molecular diagnostics and health IT.

Current valuations do not reflect the strength of these drivers of sustainable long-term growth. Healthcare is a huge sector, accounting for 10-15% of GDP in developed markets. The predictable cash flows it offers translate into lower share price volatility, and rising dividends provide a stream of growing income. While valuations have come off their lows, there is potential for further multiple expansion which, when coupled with rising earnings, leads to promising future investment returns.

Innovation is a pivotal driver of investment performance in the healthcare sector. In 2012 the Food and Drug Administration (FDA) approved 39 new medicines, the highest number since 1997. The list included four ground-breaking treatments, 10 drugs to treat cancer, and also new therapies for HIV and macular degeneration, which causes blurred vision and blindness. Two of the drugs represent advances in personalised medicine, the science that uses genetic and other biomarker information to identify patients most likely to respond to a specific treatment.

Enhanced communication with the FDA early in development enables drug companies to conduct shorter, smaller studies, reducing the length and cost of drug testing. The length of the approval process has decreased substantially, with average approval times now roughly half what they were 20 years ago.


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