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Dr Michael P. Streatfield, CFA

Dr Michael P. Streatfield, CFA

Quantitative strategist, STANLIB Absolute Returns

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Health care is seen as a defensive asset. People will always get ill and spend on their health, even in difficult economic times. Innovations are financially promising, but basically health care depends on the cash cow of past drug patents and discoveries.


This leads to more resilient asset class behaviour, less exposed to market downturns:

  • In bear markets, health care (as measured by the MSCI ACWI Health Care sector’s net returns) fell on average -8.1% on an annualised basis, versus the general global equity markets -14%.

  • In the bull market months, health care lagged global markets due to its lower risk nature, but it captured 70% of the upside (13.7% annualised for Global Equity and 9.6% for Health Care). This may look like health care underperformed, but in fact it outperformed the ACWI over this period (7.8% versus benchmark 7.2%).

Life after the pandemic

Although the price of vaccines will be tightly controlled and margins will be low, the pandemic and resulting health challenges create long-term opportunities for this sector.

Apart from age, co-morbidities played a key role in COVID-19 deaths. For example, obesity is the fifth leading risk factor for premature death[1] and it was undoubtedly one of the co-morbidities that increased illness and mortality in this crisis. Obesity has become a global problem, affecting all geographies and income levels.


Africa has the second- lowest proportion of obese adults (with 10.6% in 2016), but this is not uniform across the continent. SA unfortunately faces very high levels (28.3% in 2016) and is closer to the worst global region, namely the Americas. Once governments have tackled the short-term challenge of the pandemic, and navigated the vaccine rollout, they have an opportunity to better manage these co-morbidities. The incentive is not only social wellness, but financial, as it promises to lower future public health costs.


Threats to future health

While discussing “fat” in the system, the COVID-19 pandemic also exposed the weaknesses of over-optimised public health systems like the NHS in the UK.


In the UK, the number of beds was focused on ongoing care needs, but it lacked sufficient capacity for a healthcare crisis. Despite the older UK population, WHO reports the UK only has 24.6 beds per 10 000 people, equivalent to SA’s 23, but way behind France’s 59.1 or Germany’s 80 beds per 10 000 people.[2] Health care needs will be reassessed politically after the crisis, and it is likely that the public will want to see greater spending on health care.


There is growing evidence that this virus has a lingering effect and is impairing lives.[3] It appears long- term lung damage can occur. Viruses also tend to weaken the immune system. So, this damage could go beyond the lungs, including severe fatigue, joint pain, neurological damage, and heart disease (occurring due to an over-reactive immune system).


Although we are unsure of the exact extent of this long-term harm, we can be certain the COVID-19 health care impact will not simply end after a vaccine rollout.


Tightening regulation

Another spectre lingering over health care’s future has been tackling high pharmaceutical prices in the US. Certainly, Medicare’s inability to negotiate drug prices, and consumers’ inability to import drugs for themselves, presented substantial protective, and possibly non-competitive, barriers. However, the Biden Health Care plan is net positive. It will increase spending by $352 billion over ten years.


Movements by governments, both in SA and globally, to tighten health care regulation will cause some disruptions. However, moves on drug pricing have been well flagged and companies have had time to adapt. Large capitalisation companies also have the cash and lobbying muscle to engage and shape regulation, and soften any potential blows. I believe that the pandemic makes the health care industry more of a partner with government in jointly solving the health crisis, and relieves governments of some of the blame (perhaps shifting that blame onto technology).


Go for a cycle

This is not a purchase recommendation for health care, but more a discussion of the risk factors and the strategic drivers as we assess health care’s role.


Current positioning in the cycle could be attractive for health care stocks. If a cyclical recovery is indeed under way, with rising inflation risks (though we still expect deflationary forces in the short term), then health care’s pricing power can be a boon in a rising inflation environment. As we monitor the economic recovery and market action, health care is an asset under consideration.




Article references:

[1] See deaths by risk factor charts for more information on other risks.

[2] Source: Accessed 24 Nov 2020.

[3] For more on these studies read Nature’s “The lasting misery of coronavirus long-haulers”, 14 September 2020, Or see the CDC’s list of long-term effects

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