The more one looks at forecasts for an ageing global population, and stgelopments in preventive medicine, the stronger the case for a higher portfolio allocation of healthcare stocks. But most of the action is overseas and many top healthcare stocks are overvalued.
Perhaps the simplest way for Australian investors to gain exposure is through the iShares Global Healthcare Exchange Traded Fund (ETF). It seeks to replicate the price and yield performance of the S&P Global 1200 Healthcare Sector index, which comprises leading multinational healthcare companies such as Johnson & Johnson and Pfizer.
The ETF has a one-year return of 45 per cent and a three-year average annualised return of almost 37 per cent to March 2015. The NASDAQ Biotechnology’s index bull run and the lower Australian dollar (the ETF is unhedged for currency movements) have been ideal conditions.
Chart: iShares Global Healthcare ETF
This column identified the iShares Global Healthcare ETF for The Bull as one of “five themes to buy now” in July 2014. I wrote: “It’s hard not to like the short- and long-term outlook for leading global healthcare companies as the population ages … About two-thirds of its exposure is in global pharmaceutical companies; the rest is in medical stgices. (The iShares healthcare ETF) is a simple way to increase portfolio exposure to healthcare, although returns will likely moderate from such high recent levels.
I was wrong on the last count: the ETF’s gains quickened as the NASDAQ Biotech index raced to new highs, continuing a remarkable bull run since January 2012. Rising demand for healthcare stgices and breakthroughs in preventive medicine, thanks to rapid advances in technology, have put a rocket under that index and reminded investors about the power of life sciences.
However, I would caution against loading up on global biotechnology companies at current prices and trying to jump on board the NASDAQ Biotech index’s steep ascent.
Don’t get me wrong: I like the prospect of high-quality multinational healthcare and biotechnology companies in portfolios for the long term. They are superbly positioned to capitalise on an ageing population and benefit from the coming boom in middle-class consumers in emerging economies and, over time, rising demand for healthcare in those economies.
But buying near the top of booms, when hype peaks, is a sure-fire way to destroy capital. Long-term investors should watch and wait for better value during an inevitable pullback or correction in the NASDAQ Biotech index.
As the chart below shows, the index has soared more than threefold since 2012. No price index goes up in a straight line forever. After peaking at 3837 points in mid-March, the index has met more resistance, retesting that peak before easing to 3608 points.
Chart 2: US NASDAQ Biotechnology index
Perhaps that is a sign of growing buyer exhaustion in the index, although it is too early to know. Traders will watch closely if a double-top has formed in the chart pattern, which is usually followed by a larger fall, and if the index breaks resistance around the 3540 level.
Some US traders are talking about the recent sell-off in US small-cap and biotech stocks as a harbinger of a possible deeper sell-off in US equities, which would not surprise, given the magnitude of their gains in the past few years. At one point this week, the NASDAQ Biotech index lost almost 5 per cent, and the US equity market is overdue for a correction.
I usually prefer to focus on company fundamentals and taking a bottom-up approach to finding value, rather than rely on charting signals or too much on top-down trends. But an opportunity to buy back into the global biotechnology boom at lower prices, via the iShares Global Healthcare ETF, might emerge in the next two quarters.
In the short term, further expected weakness in the Australian dollar is a tailwind for the iShares Global Healthcare ETF. And longer term, few sectors have such outstanding prospects for Self-Managed Superannuation Funds (SMSF) as healthcare.
It is more a question of buying in at much lower prices, ideally during a market correction, and being ready to pounce when an almighty global biotech boom loses steam. Keep a close eye on the NASDAQ Biotech index: if it is starting to roll over after such spectacular gains, value will quickly emerge. Standing aside until the index consolidates will be the best strategy.
Tony Featherstone is a former managing editor of BRW and Shares magazines. The column does not imply any stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at April 30, 2015.