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4 reasons to own healthcare stocks

Image: GlaxoSmithKline: Fair use

If you’re looking to beat the market over time, it makes sense to invest in sectors that are likely to grow fastest. And one sector that has compelling long-term growth appeal is healthcare. Driven by several powerful themes including the world’s ageing population and urbanisation in emerging markets, healthcare is likely to generate many investment opportunities in the coming years for patient investors. Here’s a look at several key reasons to own such stocks. 

Powerful drivers

At the heart of the bull case for the healthcare sector lies a long-term secular trend that is hard to ignore – the world’s ageing population. Global average life expectancy has increased substantially in recent decades, and the number of people aged 65 or older is set to double by 2050. Furthermore, the over-80 age group is expected to triple in size by 2050, rising to around 4.5% of the global population. 

It’s not rocket science to realise that as people age, their demand for healthcare increases. And therefore it’s highly likely that the world’s ageing population will act as a strong tailwind to the sector in the long term, as demand for its products and services rises.

Another key driver of demand will be growth in emerging markets. There’s a strong correlation between GDP and healthcare demand, and as countries such as China, India and Brazil develop, their populations become more wealthy so their demand for healthcare is likely to increase. Analysts believe that emerging markets could add $1trn in additional global health spending by 2050.

Lastly, modern sedentary lifestyles are also driving demand, with incidences of obesity and diabetes rising sharply in recent decades. Demand for drugs that combat these issues is likely to remain strong. 

Undemanding valuations

Despite the long-term appeal of the industry, the sector is attractively valued at present. Indeed, fund manager Neil Woodford recently stated that it hasn’t been this cheap since the early 1990s. For example, healthcare giant GlaxoSmithKline trades on a forward looking P/E ratio of 14.6, which seems reasonable given the high valuations of many other defensive stocks. Investors have approached the sector with caution in recent years, as patent cliffs and drug pricing issues have added an element of uncertainty in the short term. But with the long-term story still intact, how long will the sector stay undervalued?

Dividends and capital growth

Another attraction of the sector is the dividends on offer, with companies such as Glaxo and AstraZeneca currently paying huge dividends. Whether you’re looking for income in retirement or just to compound dividends over the long term, the healthcare sector offers some excellent opportunities.

There’s also plenty of potential for capital growth. Just look at the returns of some of the smaller healthcare stocks in the FTSE 100 in recent years. Hikma Pharmaceuticals and Shire have returned 180% and 107% respectively in the last five years alone.

M & A potential

Lastly, there’s also potential for merger and acquisition activity. To thrive in this industry, companies need to stay innovative. And one way companies can do this is by acquiring other companies for their drug pipelines. It’s a trend we’ve seen in recent years and with valuations across the industry relatively low at present, it’s likely the trend will continue going forward.  

That's why The Motley Fool picked a health stock in this portfolio 

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Edward Sheldon owns shares in GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca and Hikma Pharmaceuticals. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.