Opportunities in an ageing population
This article appeared in the September 2014 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.
By John Abernethy, Clime
Many investors would have seen the strong sharemarket debut from residential aged care operator, Japara Healthcare, in mid-April. The stock closed its first day at $2.70, some 35 per cent above its $2 listing price.
The excitement Japara generated reflects the market's belief that Australia's ageing population and the retirement of the great wave of baby boomers is creating significant investment opportunities.
There is no doubt that an ageing population will be one of the biggest trends to evolve in Australia over the next 30 or so years. According to the Australian Bureau of Statistics, the proportion of 65-year-olds and older will rise from 14 per cent to 22 per cent by 2061.
This throws up significant challenges for governments, including greater demand on the public purse through higher spending on pensions and healthcare. But it will also create opportunities for companies and investors.
(Editor's note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to a licensed financial adviser before acting on themes in this article).
There has been much focus on the baby boomers' lack of superannuation savings, but significant wealth is collectively tied up in their homes and investment properties outside super. As they move from work to leisure, they will increasingly spend some of that wealth on travel, restaurants, retail and entertainment. That should benefit travel operators such as Flight Centre and Webjet, and travel insurer Cover-More.
But retirees are also expected to live longer, which does increase "longevity risk" - the risk retirees will outlive their savings. That creates opportunities for financial services providers to come up with innovative products to provide income streams through the likes of annuity products, which Challenger is growing strongly.
Retirees' living arrangements will also change. They will increasingly move into retirement villages, then shift into residential aged care when their ability to look after themselves diminishes. That will see an increase in demand for residential aged care, which has underpinned the enthusiasm for the likes of Japara shares.
Perhaps the greatest demand will be on medical services, which will increase the need for pharmaceuticals, testing, hospitals and individual healthcare needs. Deloitte Access Economics, for example, estimates that the number of Australians living with dementia will quadruple by 2050.
It should be noted, however, that buying stocks on the basis of a long-trend trend is a dangerous strategy if underlying value is ignored.
Ageing-related stocks are currently divided between recently listed or relisted stocks such as Japara and Healthscope, and more established players, particularly the private hospital and medical centre operators such as Ramsay Healthcare and Sonic Healthcare.
Clime believes it is best that investors wait for a sharemarket correction or pullback, and a return of prices closer to value before taking opportunities in stocks that benefit from an ageing population.
Below are eight stocks that Clime believes are best placed to benefit from Australia's ageing population in the long run:
One of the major challenges facing Australia's retirees and ageing population is provision of retirement income streams. Most Australians take their superannuation in a lump sum rather than an annuity, which provides ongoing income payments over a period of time.
Challenger's Life segment offers fixed-rate retirement and superannuation products, which are growing strongly and will continued to do so. In the most recent half, annuity sales growth was 38 per cent to $1.5 billion.
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.
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.
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.
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.
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.
Fleetwood should benefit from the trend for grey nomads to buy caravans, which the company makes, and set off around Australia. The company also makes mobile homes for areas near mines. As the company says, it covers resources, recreation and retirement. Unfortunately, its accommodation business has been hit by the cooling of the resources boom.
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.
About the author
John Abernethy is the Chief Investment Officer of Clime Asset Management. The Clime Australian Value Fund is one of the best-performing Australian equity funds over 1, 3 and 5-year periods.
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