Trade of the week: Emerging Markets

We are used to seeing headlines about China selling more than 100m smartphones a year or more than a million cars a month, but often we miss other statistics.

These include the fact there are more than 100m people over 65. Needless to say, China’s healthcare spending is an interesting sector for investment.

The Chinese government has set a target of providing a universal healthcare system for both rural and urban residents, and the projected annual spending is set to triple to $1trn (£650bn) by 2020.

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It is not uncommon for rural residents to have to travel to a city to receive the healthcare they need and this level of care is largely unaffordable. Along with increased investment in hospitals and medical equipment, medical training is also on the agenda.

Healthcare was an interesting theme a few years ago, but it is often overlooked because it only accounts for a small percentage of the benchmark (0.46 per cent), as most companies are small cap. Additionally, the Chinese government’s pledge to make healthcare more affordable has led to drug prices falling by double digits due to the aggressive tendering system adopted in the last few years. This has affected some drug companies’ earnings, making them less appealing to investors.

While this has also affected the pharmaceutical distributors’ revenues, I believe this is a short-term view from markets and not an understanding of the eventual outcome. Smaller pharmaceutical distributors will be forced out of the market due to not having the necessary scale to make profits, which will lead to larger organisations such as Sinopharm Group being the eventual winners from industry consolidation.

The stock was recently sold off by the market following the release of its first quarter 2013 sales growth, which of course was affected by the drug price cuts, and provided me with an opportunity to increase my healthcare exposure.

Sinopharm is China’s largest pharmaceutical distributor with more than 10 per cent market share. It has its own stores, like Boots and Superdrug, but also distributes directly to China’s hospitals, accounting for approximately half its revenue.

I am currently overweight the healthcare sector, with a 5.5 per cent weighting across three different companies. I do not hold any direct drug companies, as I believe we are yet to see the bottoming of drug prices, and prefer to gain exposure through medical product suppliers.

I hold Shandong Weigao, which specialises in single-use syringes and blood bags. I also hold Mindray Medical, a medical device manufacturer which manufactures diagnostic instruments such as heart monitors.

While we are likely to see China’s GDP growth rate slow to its target of 7.5 per cent this year, there are still some interesting sectors to invest in.

I can’t see any potential risks to China’s healthcare spending targets, since it has an ageing population and I also believe it will soon relax the single-child policy – two key reasons why healthcare spending is essential.