Thematic investing: Health and demographic change
The coronavirus pandemic has made it patently clear that, aside from its direct threat to life and limb, this scourge has also endangered the global economy. The far-reaching consequences of Covid-19 include not only the further rise in healthcare costs, but also an alarming increase in government indebtedness. Even after the current pandemic wanes there will be the abiding realisation that a similar health hazard could arise at any time, and that healthcare systems must be better equipped to contend with such extreme circumstances.
Demographic change is another reason why the global healthcare system itself needs a booster. Life expectancy rates continue to rise and in consequence are causing changes in consumer behaviour as well as creating new demand, such as the care for the elderly. These are compelling investment themes for growth-oriented investors.
Healthcare system supports economic growth
If one considers both the direct and indirect costs of the Covid-19 pandemic, the cumulative amount is practically unfathomable – and it will remain an albatross on society’s neck for decades to come. The industrialised nations have added huge sums to their already mountainous debt loads. In the eurozone, the ratio of government debt to gross domestic product (GDP) rose from 83.9% in 2019 to 98% at the end of 2020.
In battling the pandemic, each country has looked out for its own best interests. The industrialised nations readily snapped up the most effective vaccines, to the detriment of the emerging economies. This inequity is now taking its toll: emerging markets have been repeatedly forced to impose lockdowns, which in turn hinder their ability to export products to the West – one of the major reasons for today’s supply-chain bottlenecks. The global division of labour has resulted in crucial interdependencies between developed and emerging economies; hence, the industrialised nations also have a vested interest in ensuring the overall resilience of the health and economic systems in other countries, not just their own. It follows that building up capacities in emerging countries for the production of drugs and vaccines as well as ancillary medical supplies has become an imperative. Consulting firm McKinsey estimates that the expenditures involved in such an endeavour would amount to somewhere between USD 285 and 430 billion over a ten-year period, far less than the approximated USD 16 trillion plus global cost of Covid-19.
Greater prosperity in developing countries also results in broader local access to medical care. By the same token, their domestic economic growth is spurred and ultimately pays dividends in the form of expanded production possibilities and sales markets for Western companies.
However, the developing countries are not the only example of the impact healthcare has on economic progress. The US, for instance, has one of the highest GDP growth rates among industrialised nations and its per-capita spending on healthcare clearly surpasses that of its peers. But a closer look reveals an anomaly: life expectancy in the US is lower than in most of the other industrialised nations, namely 77.3 years – despite America’s disproportionately large expenditures on healthcare. This suggests that the system is inefficient.
Although the US is perhaps an extreme example, the importance of enhancing the cost efficiency of healthcare systems in developed nations is becoming increasingly clear. One way to accomplish this is by utilising a broader range of more affordable technologies such as telemedicine and making available low-cost drugs, therapies and medical consultation services. Teladoc is an example of a telemedicine company that played an important role in America’s ability to maintain the provision of medical care during the pandemic. The company’s revenues increased by 98% in 2020, thanks in part to new business lines.
Sources: OECD, VP Bank
The pandemic has also underscored the importance and promising prospects of biotechnologies. Novel mRNA vaccines designed to protect against SARS-CoV-2 were developed and approved for emergency use within a year’s time. Moreover, in addition to fighting viral diseases, mRNA applications could have the potential to combat cancer.
Medical technology represents another pillar in the effort to significantly improve the quality and efficiency of healthcare. For example, medical robots have already made it possible for a specialist in the USA to perform a complicated heart operation thousands of miles away.
The combination of heightened efficiency and new treatment methods thanks to pharmaceutical and medtech products will contribute to improved healthcare throughout the world.
The ageing population: an opportunity
One factor affecting healthcare costs is a country’s age structure. The industrialised nations in particular are feeling the impact of demographic change in the form of their ageing populations. An ever-increasing number of the elderly, combined with lower birth rates, has by definition significant effects on:
1. the healthcare system,
2. pension schemes, and
3. consumer behaviour.
Overall healthcare system costs are also driven by an increased proportion of retirees in a population. Therefore, applications that save costs or enable more efficient patient treatment will continue to be in high demand (see above). For investors, particularly attractive opportunities lie in direct providers, be they companies in the medical products, hospital operation or pharmaceutical sectors. In the case of the latter (including biotech companies), one’s focus should be on drugs for the treatment of age-related ailments such as arthritis, as well as on developers of new products aimed at combating Alzheimer’s disease, to name just two. A treatment for Alzheimer’s alone, which reportedly affects some 6.2 million Americans, would have a potential annual market volume of several billion US dollars.
Population trends in selected regions (in millions)
Sources: World Bank, VP Bank
Furthermore, the increasing shortage of personnel in the nursing profession must be offset by technological means. Telemedicine (see above as well) is a good example of this, since the next generation of seniors will be much more familiar with the use of mobile phones and the Internet. Robotics can also play a certain role in this regard: ElliQ from Intuition Robotics and Amazon’s newly introduced Astro are just two examples of “companion and social robots” designed to support seniors in their daily lives and also to prevent loneliness. Research firm P&S Intelligence expects that the market for personal robots will more than double to approximately USD 51 billion by 2030.
As to our second point: Demographic change is also having a significant impact on post-retirement benefits schemes. In Germany alone, longer life expectancy is causing the national pension system to incur an annual contribution/payout shortfall of roughly EUR 120 billion. If the promised benefits to pensioners are to be maintained, this gap will have to be filled with additional taxes. But that money will then be lacking in other areas such as infrastructure. Thus, in terms of future retirees, private pension schemes are becoming increasingly important. Consequently, companies that offer advice and products for private post-retirement solutions, e.g. VZ Holding in Switzerland, have long-term growth potential.
China is a good example of what the unanticipated occurrence of demographic change can mean to emerging nations. The Middle Kingdom’s erstwhile one-child policy, which only came to an end under the current president Xi Jinping, had such a negative impact on the birth rate that it now seems impossible to reverse the trend (see chart). In the same vein, the lack of a state-run social security and pension system, combined with a young generation that can hardly make provisions for its own post-retirement years, is an adverse situation that can slow or even endanger the development of an industrialised nation.
Share of US national wealth by generations and age group
Sources: Federal Reserve, VP Bank
And finally to our third point: The groundswell of the so-called “Silver Generation” and consequential alteration of the overall age mix lead to a change in consumer behaviour within a society. According to data from the Federal Reserve, the post-war Baby Boomer generation in the USA currently possesses more than ten times as much wealth as the Millennials.
Until now, the focus of consumer goods and services providers has been on younger customers (a mere glance at the TV ads proves this point). But today, with Baby Boomers and Gen Xers representing the population group with the most “folding money”, companies are coming to the realisation that it makes good sense to tailor and target their offerings specifically to this segment. The ones that already focus on this age group, e.g. hearing aid manufacturers, will continue to grow steadily as the demographics change.
Wealth distribution and the growing multitude of retirees will ensure that new trends such as “healthy aging” and buzzwords like “accessibility” become ubiquitous. According to the German Federal Ministry of Health, the number of seniors receiving outpatient care in Germany alone increased by 89% between 2009 and 2018. This means that not only companies, but also communities, will have to adapt to the changing circumstances as demand increases for certain types of housing, such as assisted living facilities, and means of mobility (e.g. local transport).
Summary
The industrialised nations are facing major challenges associated with the evolution of healthcare services and demographic change. These developments, which emerging countries are also being forced to deal with (albeit in different ways), offer opportunities for long-term investors. For those who wish to buy into the health and aging society theme, we recommend two funds. Please get in touch with your VP Bank contact for more details.
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