Despite the outlook for U.S. and European economies being highly uncertain, the U.S. dollar and the euro remain the world’s dominant currencies. However, the importance of these two currencies is diminishing, which is not surprising given the huge debt problems in both markets. In order to hedge against a further devaluation of the two currencies, investors are increasingly looking beyond their own borders to find attractive investment opportunities. Currency diversification should be a key focus; that’s now obvious to everyone. But what should you do once the dollars or euro have been exchanged to Singapore dollars, Norwegian crowns or Swiss francs? While holding cash in those currencies certainly seems to be a short-term option, people need to find investment ideas where they can put their money to work in the long term.
It is admittedly a rather difficult task to find good investments today; this is especially true for equities. With the U.S. and Europe looking less attractive for the reasons mentioned above, investors naturally need to start looking at some emerging markets. There, they can still find good companies with excellent growth potential and attractive valuations. From a geographical point of view, it seems to make sense to diversify into emerging markets. But what industries are attractive in those markets? Selecting investments and looking for investment opportunities don’t get much easier if one compares different industries. For example, investing in banking stocks seems very unattractive in many markets given the fact that there is a global trend toward stricter banking regulations and requirements to hold higher capital reserves. Globally, regulators hope to make the world’s banking system more stable by requiring banks to hold more capital. From an investment point of view, this means that many of these companies will probably see a prolonged period of time with moderate or even disappointing profit growth.
In some of my previous articles, I have written extensively about some interesting markets and industries such as commodity- and agriculture-related investment opportunities. Today, I would like to make a strong investment case for Asian healthcare companies. I believe this is an industry with tremendous growth potential in the next decade (and most likely beyond that). However, few people are aware of the exciting opportunities there. And, yes, I know. Many people probably can’t hear the word “healthcare” anymore, because there has been too much negative noise about it in connection with the healthcare bill in the U.S. However, with Western countries struggling to control their rapidly increasing healthcare cost, the dynamics in the Asian healthcare market are very different. People in Asia have a fundamentally different relationship to healthcare. For many people, having access to good medical facilities is viewed as a prestige thing. This also explains why Asians spend so much money for lifestyle medicine and plastic surgeries. With fast-growing middle classes in many Asian countries, the demand for good, quality healthcare is rising very rapidly.
The global healthcare market consists of various subsectors that include pharmaceutical companies, hospital operators and biotech and medical technology companies, just to name a few. While growth rates in Western markets are slowing, the healthcare industry in Asia is growing at a rate of about 15 percent annually; some subsectors experience even higher growth rates. Healthcare penetration is still low in most Asian countries, and very few people have private health insurance. Also, healthcare infrastructure is well below Western levels. India, for example, has only 1.27 hospital beds per 1,000 people, that is less than half the global average of 2.6 and far away from the four beds per 1,000 people recommended by the World Health Organization. Demographic factors, as well as increased government and private-sector activity, will increase healthcare penetration. This will initiate a massive amount of investments in the sector. Again to take India as an example, it is expected that about $180 billion will be spent in the next five years on healthcare infrastructure alone.
There are enough positive domestic drivers that make the Asian healthcare market attractive. However, on top of the domestic factors, there is also increasing demand coming from other sources, such as medical tourism. With more and more people in the West struggling to afford medical costs, the incentive to look for treatment abroad is growing quickly. For example, a hip-replacement procedure costs between $25,000 and $40,000 in North America and Europe. The exact same procedure costs about $10,000 in places like Thailand or India. So for many people, this becomes a real option, maybe even the only option. Current data suggests the medical tourism market is growing at a rate of about 40 percent annually. This will add further momentum to an already booming market, and the underlying demographic trend suggests the Asian healthcare market will continue to grow at a rate of about 15 percent for at least another decade.
There are various ways investors can take an exposure to this promising market, but the most obvious way is to invest in Asian healthcare companies or Western companies with a high exposure to this booming market. In our view, it makes sense to select companies that have a diversified business model across several key markets in Asia. Given the fact that government’s role in regulating healthcare in each of these Asian countries is still very important, the political risk should not be underestimated. Also, investors should carefully review each company and its actual business. Here again, it is probably not ideal to select smaller companies with a very narrow focus on one small niche. This is often the problem with some of the medical-technology companies. Among our favorite investments are larger, well-diversified companies that can generate returns from a number of different markets and from various business channels. We currently view hospital and clinic operators as one of the best ways to invest in the growth of the Asian healthcare market.
The chart below shows the price development of two of the most popular Asian Healthcare market indices, the FTSE ST Healthcare Index (Singapore) and the BSE Healthcare Index (India). Both indices have rallied strongly after the sharp correction in 2008; however, both markets have achieved attractive returns in the past couple of years.
This is in sharp contrast to most large-cap healthcare stocks that are primarily focusing on Western markets. The chart below shows the historical performance of three of the most popular healthcare stocks in North America (Abbott Laboratories, Pfizer, Medtronic). Many of these companies have performed very poorly in the past decade and have even generated negative returns for investors. Of course, the past decade certainly saw a time of disappointing stock market returns, but it is surprising that not even healthcare companies have been able to generate decent returns.
There are, of course, also Western healthcare companies, which will benefit from the growth in Asia and other emerging markets. Therefore, some of these Western companies could also see better times ahead, both in terms of their sales and profits and, hopefully for investors, in the form of higher stock prices. Investors have to realize that a direct investment in Asian healthcare companies has more risk. These markets and the individual stocks are usually more volatile than their Western counterparts.
The rise of Asia will be one of the dominant investment themes in the next 20 years. The increased political power, rapid population growth and rising income levels will present a large number of attractive investment opportunities. But with high return potential also comes higher risk. That is the reason investors need to carefully select their individual investments. The Asian healthcare market is one of the most interesting investment themes today, a structural trend that will go on for many years and presents a great investment diversification for Western investors.