Welcome to Finance and Fury, the Say What Wednesday edition. This week’s question is from Shaf –

“I would like to get your opinion/analysis on Australia’s ageing population, and investment opportunities that are linked to this segment of the market. For example, companies like CGF or publicly listed aged care providers.”

Great question –

This style of investing is along the lines of Thematic investing

  1. Thematic investing involves creating a portfolio or investing in companies involved in certain areas that you think will generate above-market returns over the long term
  2. All based on Themes – which can be based on a concept such as ageing populations or a sub-sector such as leisure
    1. Thematic can be any theme – green energy, AI or technology
    2. Aging population has been a big one for a while – first saw it come into mainstream in late 2010

Because of Australian and western nations aging populations –

  1. many developed nations are facing an ageing population – While the issue might pose some economic challenges- it has been thought of as opportunities for companies and investments into those companies
  2. “demographic time bomb” – what does it look like
    1. 1950s – across the globe, there were on average 12 people in the workforce to support each dependent. By 2050, this ratio is predicted to contract to roughly 5:1
    2. Ageing populations are driven by increasing life expectancy and falling birth rates – typically seen in nations that have held ‘developed’ status for several decades
    3. In Australia – ABS data – currency 100 workers in the population for every 50 dependents
      1. By 2066 -Australia’s population estimated to be 50 million, there may be as many as 70 dependents for every 100 workers
      2. projected that the number of Australians aged 65 and over would more than double by 2055, compared with 2015
  • by 2100, it’s estimated that there will be more people aged 100 or more years than babies born in that year
  1. This demographic shift will see the public purse put under increasing strain, as a greater share of the population exit the workforce and become reliant on the government for care, medication and housing 
  1. But the question still remains – is there opportunity for investors to profit from this trend?
    1. Yes and no – Keeping an older generation fit and healthy requires significant investment in certain areas such as healthcare and technology – so having some exposure in your portfolio to stocks tapped into this sector and their healthcare counterparts, may make sense – but what areas can be invested in and how to do it?
  2. This isn’t advice – not taking personal situation into account –
  3. Major areas that may benefit – asset managers, healthcare, pharma, age care, biotech and leisure companies
    1. Side note – these predictions and forecasts on aging population demographics are long term – numbers by 2050 – and require steady growth – don’t think of this as a quick investment trade to make money – come back to this
  4. Health care – The health caresector is the most obvious beneficiary of the ageing population trend.
    1. greater population of older people, there is naturally an increased demand for health care services, equipment and supplies.
    2. Deloitte analysts predict spending on healthcare will grow around 4.1% p.a. – Growth rates forecasted above GDP growth – so if this continues the right company could beat the market
    3. also government health expenditure is expected to reach 13% of GDP by 2049-2050, up from its current levels of around 7%.
    4. demographic is likely to have implications and opportunities for investment markets
  5. Pharmaceuticals – the pharmaceuticals industry will see sizeable growth as the median age shifts towards later life
    1. Studies in the US showthat 75% of individuals aged between 50-64 use at least one prescription drug regularly – same study shows that this figure rises to 91% for 80+ age bracket.
    2. This is paralleled by the dramatic increase in the number of drugs consumed by older people
      1. the 50-64 bracket in the US held prescriptions for around 13 medicines, this number rises to around 22 for patients in the 80+ age category
    3. These figures, when put into the context of an ageing population show decent long term prospects for drug and medicine producers – especially with the thematic of medical industry in general – more profitable to treat symptoms than cure
    4. Side note – medicinal cannabis on the pharmaceuticals scene are the growing – a range of pain relief and alternative therapeutics
  6. Aged-care – Retirees’ living arrangements can also change as they age – move into retirement villages, then shift into residential aged care when their ability to look after themselves diminishes
    1. If this trend continues = see an increase in demand for residential aged care – so the aged-care industry is also one that should benefit from the ageing population and rising spending – this sector it is well-represented on the stock exchange
      1. But has its problems – more recently suffered from recent negative publicity concerning care practices, culminating in the announcement in September 2018 of a Royal Commission into the sector – work off tight spreads now that pricing caps got introduced and sit on the capital –
      2. so are rather volatile
    2. Biotech – medical research and Modern medicine
      1. The other part of the profound demographic trend of an ageing population is that with advances in modern medicine – aims are in general to not just make Australians live longer, they are enjoying more years in good health
        1. Lots of smaller companies with new promising technologies
      2. However – Investing in Australian biotechnology companies may present a level of risk and is generally a longer-term investment proposition
        1. High level of R&D – because the treatments must pass a number of stages of clinical trials in order to reach federal approval
        2. So a lot of these companies fall into the category of investing out of hopes as many don’t have solid cashflows with many income streams – example ACR (Acrux) – where I invested out of hope in 2014-
          1. Price went from $4 to $1 – so I jumped in – price drops was off bad news – but then prices bounced back to $2.20 – thought I was a genius – then over time the technology never took off and price went to $0.15 – learnt from this
  • Also faces legislation risks – Stem cell applications for treating osteoarthritis have already seen significant pickup in Japan – the nation currently experiencing the worstageing population crisis – but are open to ethical and legal risks
  1. Leisure – As Australia’s transition into retirement – there may be an increase in leisure, travel – but also general entertainment spending – going out and dining
    1. Travel spending, which is comparatively highly in Australia, increases year on year for adults until age 45, after which it plateaus – but if larger populations – then more people spending
    2. But after a certain age this spending declines – generally after 75s
  2. Asset managers – retirees are also expected to live longer – which does increase longevity risk – the risk retirees will outlive their savings – creates opportunities for financial services providers to come up with products to provide income streams to retirees –
  3. Here is where Challenger falls in – One of the major challenges facing Australia’s retirees and ageing population is provision of retirement income streams where Challenger has lots of annuity products and guaranteed products –
  4. Older articles on this claims that Challenger’s Life segment offers fixed-rate retirement and superannuation products, which are growing strongly and will continued to do so. In 2014 – annuity sales growth was 38 per cent to $1.5 billion – But was banking off the rush to lock in annuities prior to the changes in legislation to Centrelink treatment –
    1. Risk to challenger is that is focuses on the retiree markets – and products lack flexibility
  5. super has changed since then as well – competition from other asset managers – and at risks of market crashes as these companies make money off FUM – due to administration costs –
  6. Out of these options – asset managers outside of challenger wouldn’t be a thematic for aging population – as they draw down not accumulate – it would be better to focus on accumulators as a these if you want to look at this as an option

 

How to invest –

  1. Direct companies on the Australian Securities Exchange (ASX)
    1. ASX hosts Australia’s global healthcare shares including those developing medical devices for sleeping and hearing as well as plasma based therapies – also has access to private hospital operators in Australia, some of the biggest in the world.
    2. Other major domestic stocks include private hospital and medical centre operators as well as pathology, medical diagnostics, and pharmacy networks.
  2. Issues – themes can be wrong – but also Selecting individual winners amongst the heard
  3. Example – ASX – article back in 2014 to illustrate this –
    1. Japara Healthcare – Japara Healthcare owns and operates residential aged care facilities. It has 35 facilities and four retirement complexes throughout Victoria, South Australia, NSW and Tasmania. The company is highly dependent on government funding but the ageing population will continue to drive demand. At the moment there are just over 420,000 Australians aged 85 or over, or 2 per cent of the population. That is expected to more than double to 5 per cent by 2061. – Many investors would have seen the strong share market debut from residential aged care operator, Japara Healthcare, in mid-April 2014 – when it listed stock closed its first day at $2.70, some 35 per cent above its $2 listing price.
      1. Issued in 2014 – at around $2.70 – sitting at $0.5
      2. Another one was gateway lifestyle – listed – did well for a bit but then “GTY” delisted as of 26/11/2018
    2. Healthscope – Healthscope is Australia’s second-largest private hospital operator, with 41 hospital. It also has a big pathology business with 578 collection centres, 69 laboratories and 46 medical centres. The company originally floated on ASX in 1994 but was bought and taken private by private equity players TPG and The Carlyle Group in 2010, and recently returned to the market in a $3.6-billion listing – then “HSO” delisted as of 11/06/2019
    3. Primary Health Care – Primary Health Care is another play on increasing demand for medical services from an older population. It operates medical centres as well as health technology, pathology and diagnostic imaging services – Now is HLS Healius Ltd – Was at about $4.50 – now at about $3 – was trending downwards for 6 years
    4. Invocare – Invocare is the largest funeral, cemetery and crematorium industry operator in Australia, New Zealand and Singapore. It operates national brands such as White Lady. The company says the growing ageing population will increase the annual death rate from 1 per cent a year, to 2.7 per cent per annum by 2033 – $10.50 – now about the same
  4. Have been some good ones –
    1. Ramsay Health Care – Ramsay is the largest operator of private hospitals in Australia and one of the leading operators of private hospitals in the UK and France. The company is well placed to benefit from increasing private health insurance membership and an ageing population – Went through a meteoric rise from early 2000s till 2016 – stalled out since as PE and revenues have been catching up
    2. Sonic Healthcare – Sonic operates in three segments: pathology, radiology and corporate office functions/medical centre operations. The company provides medical diagnostics, laboratory and radiology services to medical practitioners, hospitals, community health services, and their collective patients. It also operates Australia’s largest network of primary care medical centres – Independent Practitioner Network – as well as other healthcare businesses. – Have been a good growth prospect – pay out okay dividends –
  5. Other options – Global healthcare indexes – One way to gain exposure to the healthcare industry is via exchange-traded funds (ETFs).
    1. Several ETF issuers have created vehicles that track global healthcare indices – allows you to diversify and pick up Aus and International shares with access to these themes – purchase some of the world’s largest listed pharmaceutical companies, medical device makers and healthcare companies in one ETF
    2. There are some risks – currency risks and also the nature of ETFs with their structuring – but a more diversified way
    3. A lot of these ETFs look like they have had great returns over the past few years – a lot of that has been the devaluation of the AUD to USD – so just watch out for that – might look like companies have been doing well – but in reality major driving factor for returns has been currency

In Summary –

Australia’s ageing population will potentially provide tailwinds for decades to come to the economy – but can provide for additional sectors of returns – from boosting the demand for drugs, surgeries, medical devices, private hospitals, medical centres and aged-care facilities, as well as services such as nursing, pathology and radiology

  1. But Remember as well – all of this is priced into these shares – it was priced in and then they don’t perform as well – or competitors come in and they sink
  2. Industry saw massive booms back at the listing of a lot of these companies – for payoffs that may take decades – so many lost steam and values and delisted in the end
  3. Nothing wrong with investing in thematic – but not fully – All because something might sound good – might not be fundamental or it might already all be priced in based around forecasts
    1. buying stocks on the basis of a long-trend trend is a dangerous strategy if underlying value is ignored.
    2. Time will tell the full extent to which Australia’s ageing population will catalyse growth in the health care, biotechnology, pharmaceutical and leisure sectors.
    3. If you are looking at getting into the theme – probably better to select an ETF and to be patient – but know you are investing for the long term and that the growth of these industries is already priced into the shares
    4. Doesn’t mean that they still wont keep going up though

Thanks for the question – anyone else

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/

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