Robert St Clair, head of investment strategy at Fullerton Fund Management, explores the reasons investors should be paying attention to the rising demand for healthcare in China.
Economic activity and global equity markets have largely recovered from the prolonged macroeconomic challenges brought about by the coronavirus pandemic, and China is no exception. Like most of the world, China experienced a COVID ‘lock-down’ driven recession, but for China, it was the first time its level of GDP had fallen in more than 40 years.
In times like these, market conditions can lead investors to adopt a short-term approach to investing, which is often less successful than taking a long-term view. China, however, presents a wealth of potential long-term investment opportunities, thanks to a range of permanent and irreversible structural trends that are currently available at attractive valuations.
One of these trends is the increasing demand for healthcare that we expect to see from China's population over the next decade. This is driven by several factors, including the expansion of the Chinese middle class, policymakers' focus on promoting common prosperity, its ageing population, and the close interdependence between healthcare and other sectors. This theme has the potential to generate significant alpha for investors who take a long-term perspective.
The rise in demand for healthcare
It is a basic fact that as income per capita increases, most countries see a rise in spending on healthcare and the benefit of better-quality outcomes with higher life expectancy (see Figure 1). We expect this trend to hold true in China as well in the coming years. President Xi has emphasised that "health is a prerequisite for people's all-round development and a pre-condition for economic and social development," aligning with the Chinese Communist Party's focus on promoting "common prosperity" rather than just pure economic growth.
China's current per capita income is roughly equivalent to where the United States was in 1980, at around $12,500 per year. Moreover, China's per capita spending on healthcare is below the global average and roughly one-tenth of what is spent in the United States (as shown in Figure 2). That said, China has achieved quality outcomes with an average life expectancy of close to 80 years (around par with the US ). This highlights the significant potential for growth in China's healthcare sector, particularly as the country's middle class continues to expand and as policymakers remain committed to promoting common prosperity. In addition to this, China’s population is also ageing, further driving demand for healthcare services. Perhaps the most obvious objective would be to increase per capita healthcare spending to at least the global average, which would demand a significant and lasting commitment by policymakers over time.
Real annual per capita health spending across selected Developed Market countries by life expectancy (from 1970 until 2015)
Real annual per capita health spending across selected countries, including the global average, by life expectancy (in 2019)
Increased healthcare spending in China is not just about consumers spending more for medical-related services and products on improved outcomes, but includes increases in R&D expenditure as well. This will help China move up the value chain with improved healthcare infrastructure, coupled with stronger drug and medical equipment manufacturers.
Opportunities from interdependence
As China's healthcare sector continues to expand and develop, investment opportunities will emerge in various industries, such as healthcare service providers, preventive care, biotech, and pharmaceuticals. For instance, China's online pharmaceutical sales are expected to double
from RMB 190 billion to 380 billion between 2020 and 2025.
Additionally, interdependent sectors like technology will also benefit from the growth of the healthcare industry. For example, the expanded use of the metaverse could lead to increased efficiency in remote diagnostics, consultations, and medical procedures.
Furthermore, IT firms that develop healthcare application software stand to gain from this trend. Non-traditional healthcare companies have been tapping into this expanding market by offering ancillary services outside their typical business models, such as Ping An's Good Doctor, Tencent's WeDoctor, and Alibaba's AliHealth. These services highlight the synergy between healthcare and technology and demonstrate the inherent interdependence of investment themes, making them potentially less susceptible to idiosyncratic volatilities. This is especially prominent across China, where given the focus of policymakers, the prospects for growth are stronger than those in the West.
In conclusion, China offers a wealth of potential long-term investment opportunities, one of which is the healthcare sector. As China's middle class continues to expand and policymakers focus on promoting common prosperity, the growth of demand for healthcare across the country is a primary structural theme that investors should consider. By taking a long-term perspective, investors can potentially generate significant alpha and benefit from this trend's potential.
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