Markets composed themselves in March, as the US Federal Reserve (Fed) capitulated to demands to pause the interest-rate hiking cycle and investors’ fears about economic growth receded. In contrast to the abrupt change of heart by Chairman Jerome Powell, our investment strategy and views on the underlying economy are unchanged.
Earnings growth continues to stall
Evidence suggests that the global economy is on the turn. The price of equities relies heavily on good earnings growth, but that growth is continuing to fall. As you can see from the graph below, earnings had been performing at historic highs, so the recent downturn could be nothing more than a minor correction. But should it become a protracted and deeper fall, then we will be looking at a fundamental economic slowdown.
Expand the chart
What do bonds tell us about the longer-term outlook?
Bond yields are currently reflecting an outlook of weaker economic growth, and therefore the likelihood that interest rates could fall in order to encourage people to borrow and spend. Amid the panic that set in at the end of last year, we were able to increase our position in short-dated high-yield and investment-grade bonds, as their prices also reflected the negative sentiment. But credit spreads have continued to narrow, and high-yield spreads are no longer cheap.
Our long-term view has not changed
If companies can deliver moderate growth in the months ahead, we can look forward to reasonable returns. But if growth stagnates, then equities could struggle, and we need to prepare ourselves for that. All the evidence suggests that we’ll soon see a moderation in global economic growth.
“Markets are calm, but the two most likely scenarios (the Fed forced to fight inflation and resume interest-rate hiking or a Fed that has tightened monetary conditions too much with last year’s rate hikes) could unnerve markets at some point later this year.” - Philip Smeaton, Chief Investment Officer
Investment view: Healthcare and technology - when two investment worlds collide
Healthcare spending is on the rise, and the outlook for the healthcare sector is looking, well, healthy! According to figures released by the Centers for Medicare and Medicaid Services (CMS)[i], which is part of the US government’s Department of Health and Human Services, national health spending in the US is projected to grow at an average rate of 5.5% per year, reaching nearly $6 trillion by 2027. That’s 0.8% faster than gross domestic product (GDP) and means that healthcare will increase its contribution to US GDP from 17.9% in 2017 to 19.4% by 2027. Such trends will also be seen globally.
Why are costs and demand increasing?
As more people live longer and become wealthier, there is a greater need for medical resources. People increasingly value healthcare, as it helps them enjoy a longer and more active life. A good example is the demand for new knees, which is projected to rise 4.3%[ii] each year between now and 2023.
But while they are living longer, more and more people are also living in ill health. Diseases such as cancer, heart disease and diabetes continue to grow as a direct result of obesity, poor diet and old age. Such illnesses come with high treatment and care costs.
Healthcare will need to become more efficient
To be able to meet the future medical demands of the global population, healthcare will need to become more efficient and effective, and technological advancements will be at the heart of that. We expect new technologies to be used in every facet of medicine – from diagnosis to surgery and aftercare. Minimal invasive robotic surgery, for example, will make operations quicker and more successful, while considerably reducing recovery time. This leads to greater efficiency and higher productivity, which contribute positively to GDP.
We can also expect to see a big change in where care is delivered – moving to the home and taking pressure off hospitals. Developments such as home dialysis, smart pacemakers and self-monitoring devices for glucose levels are cases in point.
The Sanlam view
Demographic trends mean that more resources will need to be devoted to improving healthcare services. The industry has structural growth that allows successful companies to compound an investor’s wealth over time. With steady demand these businesses often have greater certainty on revenue and cash flow, which means that investment returns are less influenced by changes in the economy. As a global investor, we look to invest in companies that prudently deploy shareholder resources to solve real-world health problems, and are rewarded with profits when successful.