Guess which sector of the Australian market has produced the best long-term performance. Banks? Resources? Think again. It’s health care.
UBS strategist David Cassidy has just completed a review of long-term sector returns and here’s what he found:
Health Care is the best performing sector over 5, 10 and 20 years. Note that globally it’s IT for five years and otherwise consumer sectors – discretionary and staples.
What does it say about Australia that health care has trumped IT and consumer stocks? Well, I think the first thing it says is we haven’t got any decent technology or consumer companies, but we have got a pretty well-functioning health care industry.
Just to be clear what we are talking about, the Health Care Index (XHJ.ASX) contains the following stocks: Ansell, Aust Pharmaceutical Industries, Cochlear, CSL, Estia Health, Fisher & Paykel Healthcare, Healthscope, Japara, Mayne Pharma, Nanosonics, Primary Healthcare, Regis Healthcare, Ramsay Health Care, ResMed, Sonic Healthcare, Sigma Health and Sirtex Medical.
So, quite a mix of different businesses, and they’re all in the ASX 300.
These stocks have posted the strongest earnings growth in the market over five years (10.8%), ten years (8.9%) and 20 years (11.2%). As a result of that they have benefitted from valuation expansion as well, especially over the past five years (19% return from 10% earnings growth).
Cassidy reports that, as a result of that, the sector price earnings ratio is now 25X, well above the 20-year average of 22.4X.
He also points out that, to a large extent, Australian health care stocks are globally oriented businesses with attractive global niches rather than plays on the domestic health system. That’s especially true of CSL, Ansell, Cochlear and ResMed.
The problem for investors now is that with growth of about 10% and a PE of 25 (that is, a PEG ratio of 2.5) the sector is expensive – or at least those stocks in the index are (with the possible exceptions of Mayne, Japara and Estia).
The task, perhaps, is to find the health care growth stocks of the future rather than those in the ASX 300 index.