Future Returns: Opportunity in Global Healthcare

The shares of healthcare companies often aren’t the first to take off when the economy recharges, but strategists at Citi believe the sector is inexpensive and worth a look.

Citi Private Bank shifted a recommendation that investors overweight their stock allocation to global healthcare by 2% to 4% in late April. That means healthcare now represents half of the bank’s recommended 8% overweighting to global stocks, making it a substantial bet.

Typically healthcare “is a more defensive asset,” says David Bailin, chief investment officer and global head of investments at Citi Global Wealth. But the bank is making this bet because “healthcare looks unusually cheap.”

Shares in healthcare companies have risen only by 15% since the end of 2019, including a 5% gain for the year through mid-April—a significant lag to the double-digit gain in the S&P 500 in that time period, according to Cit Private Bank’s April 22 global strategy report. These subdued gains are despite a valuation discount of 25% to the broad S&P 500 index, Citi said.

Also, in the U.S., the sector trades at a 30% forward price-to-earnings ratio discount to the S&P 500, the bank said.

Some of the relative drag on the sector could be related to worries about potential regulation. Proposals mentioned since the Democratic primaries have included regulation of drug prices and an overhaul of the U.S. insurance system, Bailin says.

But, he adds, “talk about actual legislation so far includes increased subsidies to fund long-term care as well as enhancements to the Affordable Care Act subsidy regime—not cutbacks.” There’s also no call for healthcare reform.

“Given that we see the Biden proposal as a ceiling, not a floor, to what can actually be passed in the current Congress, we view the odds of major healthcare regulation that would constrict the growth of healthcare revenues as lower than what the market is currently pricing,” Bailin says.

The reason to tilt to healthcare is to gain exposure to global growth, exposure to stocks with high dividend yields, and exposure to what Citi views as an “unstoppable trend”—the demographic shift within many countries to older populations that have the money to spend on the healthcare they increasingly need.

Penta recently spoke with Bailin about where the opportunities in healthcare are.

Why Is Healthcare Undervalued?

Healthcare historically trades at a lower valuation to the market, but always at a correlated lower valuation. Since the market bottomed in March 2020, however, stocks have been driven to lofty levels by growth sectors, such as technology—a trend that stumbled on Monday as the Dow sank 500 points.

But during this period, over the last 15 months, healthcare stocks “did not inflate,” Bailin says. Their valuations remained “within a channel of normality,” yet relative to everything else, they’re “under-appreciated,” he says.

One interesting note about healthcare is that the sector hasn’t ever had a down year in revenues or earnings—even during the years of the financial crisis, 2008-09—since the late 1980s. “How much would you pay for that consistency? Right now, you’d pay a lot,” Bailin says.

Also, the bank’s strategists note in the April report that the sector has not been a bad place to be when markets slide. “Healthcare has historically fallen the least among market segments during corrections,” the report said.

Which Sectors to Focus On?

In terms of specifically where to invest, Citi wrote that “the long-term case” for spending on healthcare “rests on aging demographics, rising income levels in emerging market countries, and tremendous innovation in vaccines, gene therapy, med-tech, wearables, Alzheimer’s treatments, and much more.”

One company that will benefit from current demographic shifts, for instance, is San Diego-based Dexcom, which develops, makes, and distributes monitoring systems for diabetes.

Biotechnology and biopharmaceutical companies also should benefit, given the important role these companies play in drug discoveries and treatments.

To capture global growth—and high dividend yields—Citi recommends companies such as Chicago-based biopharmaceutical AbbVie (with a 4.5% dividend yield), and companies listed on exchanges outside the U.S., where stocks are slightly less expensive, Bailin says. An example of the latter is Paris-based multinational pharmaceutical company Sanofi, which also has a high dividend yield of 3.7%.

Citi also likes companies creating healthcare delivery systems, such as telehealth—services that allow patients to interact virtually with their health-care practitioners.

“There are a whole bunch of companies that are changing the delivery modality to moving away from the hospital and away from the office,” Bailin says. “We think this will happen with many sectors.”

Also worth a look are companies involved in medical devices, robotic surgery, or “anything that creates better decisions,” he says.

Intuitive Surgical, for example, is the leader in robotic-assisted surgeries, Bailin says. It “continues to expand into new surgical indications, and the [total addressable market] is enormous.”

In the wake of the pandemic, Bailin expects some pharmaceutical companies and companies focused on physician-administered therapies and vaccines will get a boost temporarily as people return to the doctor for the first time in more than a year.

“Instances of disease are lower, but it doesn’t mean they actually are lower—they are just not reported,” Bailin says. “We have a bunch of catch-up over the next 12-to-24 months to [get] back to baseline interaction with healthcare providers.”

New Jersey-based Merck, for instance, could benefit “given that its oncology and vaccines are a significant percentage of revenue,” he says.

What About Technology?

While the technology sector had a bad day on Tuesday as the market rotated out of growth stocks, investors may not be ready to abandon hot tech names just yet. In announcing the tactical shift higher in healthcare, Citi noted that investors who followed their recommendation would still have plenty of exposure to technology.

Investors who follow Citi’s recommended 60% allocation to global stocks as defined by the investable MSCI All Country World Index will have 12.6% of their portfolio invested in technology, according to Citi. The recommendation to increase healthcare to a 4% overweight will lead to an 11.2% exposure.

“For decades the sector has carried some modicum of political and headline risk,” Citi wrote. “But that has yet to upend an enviable record of positive revenue growth. Steady revenue growth at a deep valuation discount is the type of script we like.”

GENOA, Italy—Renato Zanelli crossed the finish line with a rusty iron hanging from his neck while pulling 140 pounds of trash on an improvised sled fashioned from a slab of plastic waste.

Zanelli, a retired IT specialist, flashed a tired smile, but he suspected his garbage haul wouldn’t be enough to defend his title as world champion of plogging—a sport that combines running with trash collecting.

A rival had just finished the race with a chair around his neck and dragging three tires, a television and four sacks of trash. Another crossed the line with muscles bulging, towing a large refrigerator. But the strongest challenger was Manuel Jesus Ortega Garcia, a Spanish plumber who arrived at the finish pulling a fridge, a dishwasher, a propane gas tank, a fire extinguisher and a host of other odds and ends.

“The competition is intense this year,” said Zanelli. Now 71, he used his fitness and knack for finding trash to compete against athletes half his age. “I’m here to help the environment, but I also want to win.”

Italy, a land of beauty, is also a land of uncollected trash. The country struggles with chronic littering, inefficient garbage collection in many cities, and illegal dumping in the countryside of everything from washing machines to construction waste. Rome has become an emblem of Italy’s inability to fix its trash problem.

So it was fitting that at the recent World Plogging Championship more than 70 athletes from 16 countries tested their talents in this northern Italian city. During the six hours of the race, contestants collect points by racking up miles and vertical distance, and by carrying as much trash across the finish line as they can. Trash gets scored based on its weight and environmental impact. Batteries and electronic equipment earn the most points.

A mobile app ensures runners stay within the race’s permitted area, approximately 12 square miles. Athletes have to pass through checkpoints in the rugged, hilly park. They are issued gloves and four plastic bags to fill with garbage, and are also allowed to carry up to three bulky finds, such as tires or TVs.

Genoa, a gritty industrial port city in the country’s mountainous northwest, has a trash problem that gets worse the further one gets away from its relatively clean historic core. The park that hosted the plogging championship has long been plagued by garbage big and small.

“It’s ironic to have the World Plogging Championship in a country that’s not always as clean as it could be. But maybe it will help bring awareness and things will improve,” said Francesco Carcioffo, chief executive of Acea Pinerolese Industriale, an energy and recycling company that’s been involved in sponsoring and organizing the race since its first edition in 2021. All three world championships so far have been held in Italy.

Events that combine running and trash-collecting go back to at least 2010. The sport gained traction about seven years ago when a Swede, Erik Ahlström, coined the name plogging, a mashup of plocka upp, Swedish for “pick up,” and jogging.

“If you don’t have a catchy name you might as well not exist,” said Roberto Cavallo, an Italian environmental consultant and longtime plogger, who is on the world championship organizing committee together with Ahlström.

Saturday’s event brought together a mix of wiry trail runners and environmental activists, some of whom looked less like elite athletes.

“We like plogging because it makes us feel a little less guilty about the way things are going with the environment,” said Elena Canuto, 29, as she warmed up before the start. She came in first in the women’s ranking two years ago. “This year I’m taking it a bit easier because I’m three months pregnant.”

Around two-thirds of the contestants were Italians. The rest came from other European countries, as well as Japan, Argentina, Uruguay, Mexico, Algeria, Ghana and Senegal.

“I hope to win so people in Senegal get enthusiastic about plogging,” said Issa Ba, a 30-year-old Senegalese-born factory worker who has lived in Italy for eight years.

“Three, two, one, go,” Cavallo shouted over a loudspeaker, and the athletes sprinted off in different directions. Some stopped 20 yards from the starting line to collect their first trash. Others took off to be the first to exploit richer pickings on wooded hilltops, where batteries and home appliances lay waiting.

As the hours went by, the athletes crisscrossed trails and roads, their bags became heavier. They tagged their bulky items and left them at roadsides for later collection. Contestants gathered at refreshment points, discussing what they had found as they fueled up on cookies and juice. Some contestants had brought their own reusable cups.

With 30 minutes left in the race, athletes were gathering so much trash that the organisers decided to tweak the rules: in addition to their four plastic bags, contestants could carry six bulky objects over the finish line rather than three.

“I know it’s like changing the rules halfway through a game of Monopoly, but I know I can rely on your comprehension,” Cavallo announced over the PA as the athletes braced for their final push to the finish line.

The rule change meant some contestants could almost double the weight of their trash, but others smelled a rat.

“That’s fantastic that people found so much stuff, but it’s not really fair to change the rules at the last minute,” said Paul Waye, a Dutch plogging evangelist who had passed up on some bulky trash because of the three-item rule.

Senegal will have to wait at least a year to have a plogging champion. Two hours after the end of Saturday’s race, Ba still hadn’t arrived at the finish line.

“My phone ran out of battery and I got lost,” Ba said later at the awards ceremony. “I’ll be back next year, but with a better phone.”

The race went better for Canuto. She used an abandoned shopping cart to wheel in her loot. It included a baby stroller, which the mother-to-be took as a good omen. Her total haul weighed a relatively modest 100 pounds, but was heavy on electronic equipment, which was enough for her to score her second triumph.

“I don’t know if I’ll be back next year to defend my title. The baby will be six or seven months old,” she said.

In the men’s ranking, Ortega, the Spanish plumber, brought in 310 pounds of waste, racked up more than 16 miles and climbed 7,300 feet to run away with the title.

Zanelli, the defending champion, didn’t make it onto the podium. He said he would take solace from the nearly new Neapolitan coffee maker he found during the first championship two years ago. “I’ll always have my victory and the coffee maker, which I polished and now display in my home,” he said.

Contestants collected more than 6,600 pounds of trash. The haul included fridges, bikes, dozens of tires, baby seats, mattresses, lead pipes, stoves, chairs, TVs, 1980s-era boomboxes with cassettes still inside, motorcycle helmets, electric fans, traffic cones, air rifles, a toilet and a soccer goal.

“This park hasn’t been this clean since the 15 century,” said Genoa’s ambassador for sport, Roberto Giordano.

Future Returns: Opportunity in Global Healthcare

Strategists at Citi believe the sector is inexpensive and worth a look.

At the World Plogging Championship, contestants have lugged in tires, TVs and at least one Neapolitan coffee maker