Sector investing is an increasingly important part of advisors' tool kits. Savvy, risk-tolerant clients like the tactical nature and alpha opportunities that come with honing in on sector-level themes.
Not to be forgotten are the correlation benefits offered by investing in sectors and the above-average income lobbed off by some groups. Yet, when it comes to sectors, investors display a trait that's seen time and again across other fields of market participation: Distinct home country bias.
In some ways, that's understandable. The U.S. offers the most robust sector lineup in the world. Think about it is this way: Clients aren't clamoring for exposure to Italian tech stocks (there aren't many) or Peruvian consumer discretionary fare.
However, healthcare is one of the sectors with excellent cross-border prospects. It's also one that clients are largely apt to think is only investable or relevant in the U.S. or in familiar developed markets. China, the world's second-largest economy and biggest healthcare market.
To China for Healthcare Growth
In the U.S., the most beloved healthcare stocks – usually blue chip pharmaceuticals names – and related index funds are defensive, value bets. Sure, there's growth in the domestic healthcare sector, but it's relatively slow and clients seeking higher rates of growth have take on some risk with small-cap stocks or industry funds. Conversely, China's healthcare sector offers impressive growth rates.
“China is one of the fastest growing major healthcare markets in the world with a ten-year compound annual growth rate of 13%, compared to just 3% in the United States and 2% in Japan,” according to KraneShares research.
The coronavirus pandemic put a spotlight on China's healthcare sector, including the country's dense, expanding biotechnology space – another corner of the healthcare market where clients express intense home country bias. Advisors can help on this front because China is arguably the next most credible biotechnology market for investors after the U.S.
“The blooming biotechnology industry was on full display in 2020 thanks to vaccine development, innovative drug approvals, record fundraising, and a record number of licensing deals with multinational companies including Roche and Novartis,” notes KraneShares. “While we believe pharmaceuticals, particularly biotechnology, present the greatest upside potential, all of China’s health care sub-industries enjoyed a year of growth and positive change.”
In fact, China's healthcare sector shares a similarity with its U.S. counterpart: Biotechnology names with strong pipelines often outperform blue chip pharmaceutical rivals facing competition from generics.
Familiar Look, Growth Avenues
Many clients probably aren't familiar with the global industry classification system (GICS), meaning they may not realize sectors are usually comprised of the same industry groups regardless of home market. That's true of China's healthcare sector.
Though with different weights, China's healthcare sector, like its U.S. equivalent, is home to biotechnology, pharmaceutical, life sciences, medical device and healthcare facilities stocks, among others.
A benefit of tactical exposure to China's healthcare industry is that it offers more in the way of healthcare innovation than basic U.S. index funds do. That's meaningful because healthcare innovation/tech was growing before the pandemic and will continue doing so when COVID-19 is ultimately vanquished.
“Health tech has become an essential part of China’s health care system and is now receiving support from the highest levels of government,” adds KraneShares. “The government released a communique in December of 2020 reiterating the positive impact of Healthtech during the pandemic. As part of the 14th Five Year Plan, many recommendations to organize and expand the use of 'Internet + medical services' have been suggested.”
International sector ideas don't need to be substantial parts of client portfolios, but with China's healthcare sector driven by the familiar factors of an aging population, massive spending (it's a $1.1 trillion market) and increasing adoption of technology, advisors have some selling points to, at the very least, discuss this opportunity with clients.
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