The pandemic has massively increased a focus on healthcare and medical matters. And this opens a range of investment opportunities and business ideas. The private banking group examines the terrain.
Amidst the human and economic tragedy of COVID-19, the healthcare sector’s importance and vulnerabilities have been revealed - ensuring that it will once again be recognised as an integral part of the economic infrastructure. This article explores healthcare investing, and comes from James Cheo, who is chief market strategist, SEA, HSBC Private Banking. The editors are pleased to share these thoughts on a highly timely topic. The usual editorial disclaimers apply. To jump into the conversation, email firstname.lastname@example.org, or email@example.com
The world is engaged in a war against COVID-19 - and the health sector is on the front line.
The good news is that the race to develop treatments for COVID-19 has been remarkable both for its speed and scale, according to the Vaccine Alliance, a global health partnership. (1) So far, companies, scientific groups and institutions around the world have announced their efforts to address the novel coronavirus.
Healthcare is showing signs of
Healthcare has been one of the strongest performing sectors over the past few years, and one of the most resilient so far during the COVID-19 crisis.
That healthcare has been relatively resilient is, to an extent, to be expected: After all, individuals still need to seek medical care, even during a recession, and health needs become amplified in these times.
In fact, the US healthcare sector has outperformed the market in recent months but also over a longer period. For example, the S&P US Health Care returned 4.3 per cent and 34.9 per cent respectively in the past six months, and three years while the general market was down 3.1 per cent and up 25.3 per cent respectively.
Bifurcation of performance within healthcare
That said, healthcare faces some headwinds too - meaning that there could be some short-term volatility for the sector. Social distancing is having significant economic ramifications, and healthcare companies have not been completely spared. Healthcare providers have been the hardest hit in the sector as almost all elective activity has been suspended to focus on containing and treating COVID-19.
The pandemic’s effect on healthcare stocks through the first quarter of 2020 has been varied. Performance within biopharmaceuticals was bifurcated. Companies which expected to play a role in either developing or partnering to deliver a COVID-19 therapy or vaccine outperformed significantly. At the same time, many innovative small-cap drug stocks underperformed as a result of the uncertainty surrounding how the current health crisis might impact their ability to start or complete important clinical trials.
While a number of companies are working on antiviral and vaccine candidates for COVID-19, the view is that a vaccine will not be available in the US this year. In addition, the economic benefits from any such therapies remain unclear, particularly given the uncertainty of both the duration of the pandemic and of a potential vaccine’s allowable payment terms.
A right approach will be to look at companies which, along with their potential to contribute solutions to the fight against COVID-19, have wider portfolios of attractive therapies and assets.
When the dust settles, many countries will be investing and building up more buffers and resilience in their healthcare systems, to prepare them for possible future pandemics. This could include a rethink in the proximity and flexibility of supply chains with production being closer to the end-consumer.
Despite this, healthcare fundamentals remain
Notwithstanding challenges like these, the long-term fundamentals supporting the sector remain intact.
First, the world’s population is ageing, especially in many developed countries. This is likely to drive demand for healthcare, and boost revenues for the entire industry.
Furthermore, in many developing economies, including China and other parts of Asia, rising wealth and a growing appetite for spending more on healthcare and quality of life will continue to be a positive for the industry.
Of course, the competitive landscape will also evolve, and not all companies may benefit equally from this – or even benefit at all, for that matter. But at least the overall revenue pie for the industry is likely to grow.
What is more, there is tremendous progress being made in certain segments of the healthcare industry in areas such as the development of medical devices using advanced technology, as well as fields like gene-editing, gene-therapy and precision medicine.
These are all structural developments which we believe are here to stay - and that represents potential opportunities for companies and investors.
Investment themes on healthcare
Tele-health: Ironically, the coronavirus pandemic could accelerate much-needed disruption to the sector. While most people prefer to visit their physician in person, the pandemic has necessitated virtual visits on telemedicine platforms - the safe and convenient alternatives to a face-to-face medical consultation - which are now more popular than ever.
Clearly, the COVID-19 outbreak removed the behavioural barriers to widespread adoption of telemedicine, ensuring that telemedicine solutions are here to stay.
Robotics in healthcare: A similar observation can be made in the area of robotics and automation in healthcare, which we’ve already seen being employed across the world in the fight against the virus – and whose use is likely to accelerate in a post-COVID-19 world. According to a survey by Bain’s, the share of doctors using robotics and AI in surgery is currently at 27 per cent and is expected to rise to 49 per cent in five years’ time. (2)
Genetic therapies: The genome of COVID-19 was released on 11 January 2020, and took three hours for the biotech companies in the US and China to download. Some of them already started clinical trials of vaccines in March and April, which some scientists described as lightning speed. One common characteristic of these companies is that they all specialise in gene-based vaccines. But gene-based vaccines are made from DNA, which biotech companies can design on a computer, and thus more quickly. If these gene-based vaccines are successful, it would be a milestone as this is a new approach and the first time they are being tested on such a scale.
Genetic therapies could significantly enhance healthcare in a post-COVID-19 world. Unlike traditional drugs, genetic therapies aim to cure diseases by modifying or removing faulty human genetic information, actually removing the cause of illness. This represents a paradigm shift in medical care treatments.
How should we invest in the healthcare
Healthcare investing is complex and there is a need to understand the evolving investment themes.
One recommended approach is through active management which offers the benefit of diversification in tandem with skilled stock selection. A typical healthcare fund management team would comprise a large number of specialists who have considerable experience in the entire spectrum of healthcare: biopharma, healthcare services and medical technology. This would give investors the edge to capitalise on the complex nature of the sector much more effectively.
Investors can also consider healthcare exchange traded funds.
ETFs replicate the holdings of healthcare indexes, but do not
have the active management of the fund manager. The liquidity of
ETFs gives investors the ability to express short-term views very
quickly, as this liquidity allows investors to jump into or out
of positions frequently. For short-term traders, an investor can
very quickly make a play on the price swings in the sector with
low transaction fees.