As the market is trading around 10-year highs and the brief fourth quarter 2018 bear market sell-off fades into a distant memory, you could be forgiven for looking to high price earnings, momentum names as continued outperformers.
In the words of Warren Buffett, "be fearful when others are greedy and greedy when others are fearful". Given the current state of the market, we believe some caution is prudent and view now as the perfect time to better insulate portfolios from inevitable pullbacks with defensive positioning.
Interestingly healthcare as a sector has outperformed the ASX200 in eight of the past 10 years. Industry growth drivers remain strong and unwavering as we have a growing ageing population.
Keeping an older generation fit and healthy requires significant investment in certain areas such as healthcare and technology. This naturally provides tailwinds for decades to come, boosting demand for drugs, surgeries, medical devices, private hospitals, medical centres, and aged care facilities, as well as services such as nursing, pathology and radiology.
We believe the healthcare sector has all the right ingredients. While we continue to view household names like CSL (blood plasma), Cochlear (cochlear implants) and Ramsay Health Care (private hospitals) as core holdings, CSL and Cochlear are at the upper end of our valuation and we think offer better value around $170 and $160, respectively. Ramsay is exposed to challenging operating environments and increasing domestic regulatory risk, with a price around $50 a good entry point.
Interestingly, these concerns are unusually absent for the primary care/pathology/diagnostic imaging providers, Sonic Healthcare, Healius, Capital Health and Integral Diagnostics. In fact, the recent federal budget flagged favourable changes to funding for primary care and diagnostic imaging.
As the nation turns more attention to this weekend's federal election, both major parties have tabled further funding across these categories, with the Coalition promising A$1.1bn in primary care and A$309m in diagnostic imaging, and with Labor proposing a A$2.3bn Medicare cancer plan over four years and upping the ante in diagnostic imaging, with A$600m slated to cover all out of pocket payments. So, it would appear no matter which party comes to power, names across this segment look well positioned and key beneficiaries of favourable government policies.
Another broad based way of accessing exposure towards healthcare is to consider exchanged traded funds (ETFs) that are focused in this sector. One such ETF is iShares Global Healthcare ETF (IXJ). The purpose of IXJ is to provide targeted access to healthcare stocks from around the world through a single fund. Within developed economies ageing populations have been driving performance, with this fund providing a return of 14.3 per cent p.a. over 10 years.
- Boh Burima Financial Adviser | Authorised Representative: 000341081 Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410