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Click to enlarge Many emerging market countries today are struggling to find a new growth model. Those that are reliant on commodity exports have been hit especially hard in the wake of China’s economic transition and a broader slowdown in the developed world that has weighed on commodity prices. Policy tightening in the U.S. has put additional pressure on developing markets that are heavily influenced by capital flows. Those with precarious fiscal positions, including trade/current account deficits and elevated foreign debt levels have been particularly affected. These dynamics, along with more than four years of economic growth and earnings deceleration, have led to increasingly negative investor sentiment about emerging markets. Meanwhile, valuations have generally become very attractive. Although we continue to wait for an inflection point in economic growth before becoming more bullish on emerging markets, select opportunities for discerning investors exist. We believe that certain investments in the health care sector offer attractive long-term investment opportunities. Health care services/products are underpenetrated in emerging market countries and total spending on health remains well below the levels seen in developed markets. Click to enlarge Relative to developed markets, out-of-pocket expenses as a percentage of total health expenditures are high. Generally, greater consumption of health care products and services occurs as out-of-pocket expenses fall. Click to enlarge Insurance products are also becoming more ubiquitous, and government expenditure on health as a percentage of total government spending is low. These factors in aggregate suggest that there is considerable scope for growth in emerging market health care spending as emerging economies move more in line with their developed market counterparts. Click to enlarge In addition to emerging markets having the scope to increase health care spending, developing economies have the benefit of rapidly rising levels of income and wealth, especially compared to developed markets. Empirical evidence shows a strong correlation between rising incomes and increased spending on health care, as medical care is one of the first areas in which individuals tend to increase spending as incomes grow. With wages and salaries expected to continue rising in emerging markets, consumers are slowly gaining access to services and products that were once out of reach. We believe that this trend will create myriad investment opportunities for years to come. Furthermore, we expect this investment theme to be more insulated from cyclical economic factors given the vital, essential nature of obtaining better health care. As an example, consumer health expenditure growth in many emerging markets remained robust throughout the Global Financial Crisis; 2008 – 2009 annual health spending per capita in Brazil, Russia, India, and China grew 11% on average. We believe the beneficiaries of this investment theme will be present across a number of different industries within the health care sector. These include insurance providers, pharmaceutical manufacturers, hospital owners/operators, medical equipment and supplies manufacturers/distributors, and other health care service/goods providers. Target companies do not need to be domiciled within emerging market countries to benefit from this theme provided a significant share of revenues and operating profits comes from developing markets. Despite the favorable structural backdrop for rapid growth in emerging market health care spending, it is important for investors to understand individual country dynamics and reforms that may aid or impede the consumption of health care. Investors should focus on fundamentally sound companies that have above average growth rates, attractive valuations, and are taking share at the expense of their competitors. Scalper1 News
Scalper1 News