Is Healthcare a Safe Haven for ASX Investors?22/2/2024 Healthcare accounts for approximately 10% of the S&P/ASX 200 index and is widely regarded as a reliable and defensive sector that provides returns that are relatively uncorrelated with the rest of an investor’s portfolio and the economy at large–often with less volatility. After all, spending on healthcare is usually non-discretionary–when you need it, you need it–and health challenges occur regardless of the state of the economy. Unlike certain other sectors, such as consumer staples, it is also an area where consumers are willing to spend a greater amount as their wealth increases. An ageing population (as we are experiencing in Australia) is another tailwind for the sector, and technology advancements can also create new opportunities for both revenues and positive patient outcomes.
In addition to the other benefits described above, the healthcare sector is also one of the rare parts of the Australian share market where companies have proven their ability to compete on the world stage. One challenge for the Australian market is its small size, which can limit the long-term growth potential of companies in many sectors, particularly retail. (There is a limit to how many stores are needed for a population of “only” 25 million, especially when competing with global online marketplaces). However, many of Australia’s leading healthcare companies are not just a ‘big fish in a small pond’ but are also global leaders in their respective fields. This includes former government spinoff and biotechnology juggernaut CSL Limited (ASX: CSL), hearing implant specialist Cochlear (ASX: COH), sleep apnea device manufacturer Resmed (ASX: RMD), and disinfection device developer Nanosonics (ASX: NAN). Each of these businesses has successfully expanded its operations around the globe, driving much higher growth and profitability than investors would typically expect from companies in the healthcare industry. Not all healthcare companies on the ASX are global champions and not all have been successful in their overseas endeavours. Ramsay Health Care (ASX: RHC), for example, has had difficulties navigating the more complex and government-controlled economies in places like France, when attempting to replicate its private hospital model. Nor are all ASX healthcare businesses capable of producing high growth rates. NIB Holdings (ASX: NHF) has managed to deliver very attractive returns for shareholders based on a strategy of taking market share in the private health insurance industry, but Medibank (ASX: MPL) has generated a meagre 1.5% compound annual growth rate (CAGR) in revenue since its IPO, given how high its market share was 8 years ago. While capital growth has not been remarkable, Medibank’s total shareholder return has still been above the market over this time though, supported by consistent profitability and a strong dividend. There’s no doubt that the Australian healthcare industry can provide interesting opportunities for patient, long-term investors – if shares can be bought at the right price. To align with TAMIM’s principle of “buying well,” it’s important to recognise that investing in healthcare is not a free pass to buy at any valuation.
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