Age of uncertainty –
Long-term developments in demographics and health, rising expenditure in this area are important issues driving trend rates of economic growth. These factors have high-level implications for strategic asset allocation, as well as creating a complex investment environment where active investment decisions are favoured.
Major economic, social and technological changes need to be considered when making investment decisions, especially when determining strategic asset allocation (SAA). This article looks at some of the consequences of increased numbers of older, less healthy people for long-term market returns. We also consider the implications of current and alternative approaches to healthcare provision, and how changes could improve sustainability. We conclude with how investors are able to incorporate thinking about healthcare in their portfolios.
In general, access to healthcare is better for higher income cohorts.
Demographic developments connected with ageing pose major challenges in areas such as pensions, health and social care. For many people, retirement marks the beginning or the acceleration of declining physical robustness and mental acuity, which eventually creates the need for increased spending on both health and social care. Rethinking pensions, informed by actuarial projections, has been a long-standing focus of the investment industry. Projections of economic growth, inflation and discount rates translate into required savings and retirement ages, both of which need to rise to avert pension shortfalls. Increasing both could also improve health and reduce the spending that is required on health and social care.
This year marks a tipping point where people aged over 65 outnumber the number of those under five years, globally. Ageing, non-working populations put downward pressure on interest rates and upward pressure on health (sickness) spending. The funding required for healthcare could easily exceed the estimated shortfall for pensions of $400 trillion by 2050. However attention to healthcare has lagged, perhaps because the problem is inherently messy and mutable. Healthcare is paid for by a mix of public, private and insurance contributions, which vary widely from country to country. Healthcare spans public, private and tertiary sectors, plus a range of industries and services from the traditional to the cutting edge. As a topic, it is harder to define and contain than pensions or social care, and human interactions feed into the changing landscape.
Living up to potential
Leaving aside flamboyant aspirations of living for a thousand years and the misconception that life expectancy for babies born in recent years is hovering around 150 years, average life expectancy has been extended. With the exception of those living in places of conflict or where the climate poses difficulties, more people are realising their potential lifespan because of a decrease in child mortality in both developed and developing economies. For those born in 2016, the average lifespan is 72 years. Some nations have a lifespan of more than 80, while Russia and populous India hover around 70. However sustainability is not just about the number of years a person lives, but the quality of those years; healthy life expectancy is around nine years shorter than full life expectancy (see Chart 1).
Chart 1: Living the healthier dreamSource: WHO, OECD, Aberdeen Standard Investments (as of June 2019)
The average expenditure on health has grown in both developed and developing countries. In developed countries it has risen as a proportion of gross domestic product (GDP) from 7.8% in 2000 to 10.3% in 2016. For developing countries, the figures are 4.8% to 5.8%, respectively. The trend is sharply upward in both cases and underlines sustainability concerns as potential economic growth is subdued (see Chart 2). While US per capita spend is significantly higher than elsewhere, it is relatively ineffective in terms of increasing lifespans. Part of the explanation lies in how and where money is spent and epitomises the effect of unequal societies. Medicare and Medicaid, federal health insurance programs for seniors, permanently disabled and low income people, accounted for 37% of US national healthcare spending in 2017, equating to $1.3 trillion. The figure has risen 66% in a decade and is projected to increase at a faster pace over the next decade. Private insurance spending is rising even more rapidly without improving outcomes.
Chart 2: Who spends wins?Source: OECD, Aberdeen Standard Investments (as of June 2019)
Sustainable healthcare – ‘if I were going there, I wouldn’t start from here’
Aspects of an affordable and sustainable healthcare system may seem obvious: where possible focus on health rather than sickness, prevention rather than (expensive) treatments, immunisation for communicable diseases, and individual responsibility for health outcomes. In principle, it is hard to argue against primary care or treatment in the community rather than hospitalisation. Unfortunately nowhere is starting with a clean sheet. In 2016, the Organisation for Economic Co-operation and Development (OECD) countries spent the equivalent of just 0.3% of GDP on prevention. Those who pay the piper, call the tune; in many cases, sources of funding determine priorities. In emerging economies, building the infrastructure and widening coverage is high on the agenda. One risk is that rather than leapfrogging established healthcare models, and opting for prevention and sustainability, they adopt practices and protocols that are no longer fit for purpose.
Access to healthcare tends to be better for higher income cohorts. Even where provision is nominally universal, the immediate demands of treating the sick can overwhelm longer-term considerations and resource commitments to preventive healthcare. This argues for separate funding for preventive healthcare and tackling morbidity. It is also not clear who leads the charge. Corporate motives in the healthcare sector are notoriously conflicted, political time horizons are too short, the benefits from spending on education and prevention are hard to identify, and money that is set aside is a soft target for cash-strapped decision makers.
Tom Lehrer referred to ‘specialism in the diseases of the rich’ as a doctor’s route to riches and early retirement. Since there is an established link between affluence and longevity, this makes sense. Looking at the causes of morbidity and premature mortality is helpful. Progress on tackling morbidity in affluent societies reflects where money is being spent but there are gaps. Obesity has tripled in the last four decades in developed markets, while similar trends are developing in more affluent emerging markets. The associated growth in metabolic syndrome has increased the risk of type-two diabetes, heart attacks and strokes. Another tripling would render healthcare systems unsustainable in most countries. Lifestyle diseases associated with obesity or an overindulgence in addictive substances (tobacco, alcohol, caffeine, and drugs including cannabis and opioids) are commonplace and carry serious cost implications. These are conditions that should be targeted through prevention and education. Along with heart disease and strokes, dementia is a major cause of death in high-income countries and it is attracting more resources aimed at finding remedies. Progress is patchy, though, with recent breakthroughs in tackling some cancers while others are still intractable.
There are sources of optimism in healthcare as well as long-standing tensions, such as the question of drug pricing and the premium patented drugs pipeline versus generics. The application of new technologies could make a substantial difference. The buzzwords may be familiar – big data, artificial intelligence (AI) and robots – but in healthcare they are enablers rather than ends in themselves. Examples include robotic elements to surgery, 3D printing of skin for treating burns, joints for hip and knee replacements, and the use of algorithms for triage and updates of surgical checklists. For drug companies, big data and AI can speed up drug discovery. Unsupervised machine learning, utilising clustering for simulations and testing, increases productivity and reduces costs. With new tools and processing power, personal data can be used and shared more effectively (and suitably safeguarded and anonymised where appropriate). This offers the potential for substantial savings, particularly in primary care where the fragmentation of data has been a problem. For individuals, a blockchain-enabled personal health record would facilitate a whole life approach to healthcare, which would avoid data loss.
A lot of progress has been made in personalised medicine, thanks to DNA sequencing. Gene sequencing is the basis for genomics or gene editing via CRISPR (clustered regularly interspaced short palindromic repeats). Synthetic biology marries biotechnology with engineering to digitise DNA, meaning that individual cells can be reprogrammed. These technologies are on the cusp of reducing the incidence of certain diseases and conditions, which should change their outcomes. The analysis of the trillions of microbiomes – the bacteria or phages that inhabit the gut – shows how individuals respond to stimuli, including food. For example, twins can have different body shapes and outcomes despite the same diet and exercise, because gut bacteria determines how carbohydrates are metabolised. Non-exhaustive potential microbiome applications include an alternative to antibiotics, dealing with obesity (and related depression), autism, autoimmune diseases, food poisoning (salmonella), Alzheimer’s, type one diabetes, and drug treatment responses. Microbiomes fit the prevention profile and it’s not just about ingesting pro-biotics (bio yoghurt). Diverse nutrients and exercise can alter microbia. In neurology, meanwhile, using AI to re-establish neural pathways following strokes or brain damage appears promising. Reversing ageing in cells is the ultimate prize for which to strive. If that can be achieved, maybe the answer to who wants to live forever could be ‘yes’.
Paradoxically, some of the ways to extend life (antibiotics, immunisation, better hygiene and anti-bacterial measures) are also linked to a four-fold increase in chronic illness. Negative scenarios include rising antimicrobial resistance where antibiotics and standard treatments become ineffective, and where infections persist and spread. This poses the risk of pandemics. At a more basic level, bureaucracy and misguided management, mishandling of personal data, legal challenges and ethical questions all need to be tackled in the quest for workable and sustainable healthcare.
Investing in health
The mental and physical health of a population is a key driver of the labour force and long-term economic growth. Demographic headwinds and rising pressures on health versus non-health budgets suggest that future market returns will be lower than in the past. In addition to the implications of health for the Strategic Asset Allocation (SAA) investment process to determine long term returns, where and how should investors gain exposure to health as an investment theme? As with most health-related questions, the answer is not straightforward. Healthcare was traditionally seen as a defensive sector, close to a bond proxy. Established blue chip pharmaceutical companies offered generous dividends, underpinned by predictable cash flows for the duration of patents. The sector is very different today as consolidation and spinoffs abound, as companies rearrange their assets, and as service providers and insurance elements co-exist with drug and device manufacturers and innovative therapies. The regulatory debate is shifting, especially in the USA , where healthcare is again a major topic in the run up to the 2010 presidential elections. In a world of low growth, large blocks of capital chase promising new technologies. Biotechnology and life sciences sit at the disruptive end of the spectrum. They are as likely to be found in venture capital and private equity space as subsidiaries of established companies. As a result, performance at the sub-sector and industry level varies widely (see Chart 3). The division between winners and losers is marked and failure rates are high, which argues for an active and diversified approach to investing.
Chart 3: Healthcare performance is anything but generic*rebased to 100
Source: Bloomberg, Aberdeen Standard Investments (as of June 2019)
In general, access to healthcare is better for higher income cohorts.