It is difficult to predict the future but we do know that the population of the world is growing and that its composition is expected to change as follows:
It is projected to grow from seven billion today to nine billion by 2030;
Higher living standards and better healthcare should increase life expectancy;
The middle class as a group should grow, particularly in emerging economies such as China and India, and this will create greater demand for consumer products.
These outcomes are high probability outcomes and, therefore, it makes sense for investors to focus on companies that will benefit from these trends, namely companies in the healthcare and consumer staples sectors.
It is clear that a growing and aging population will generate greater demand for healthcare products and services. Moreover, the population of over 85s is expected to grow significantly and studies show that expenditure on healthcare by these over 85s is many multiples greater than that for those under 65. Aging and greater urbanisation (expected in emerging economies) lead to more stress, heart disease, cancer, diabetes, limb replacements, hearing aids etc and this should allow for steady growth in demand for healthcare products and services. The sector does face some problems in the near term in the form of expiring patents and government austerity driven cutbacks but the long-term outlook for the sector is very positive.
Companies in the consumer staples sector are mainly suppliers of food, beverages, tobacco, soap, toothpaste, detergents etc. Companies in this sector include Coca Cola, Walmart, Proctor and Gamble, Diageo, Philip Morris, Nestle… all of which have strong brands. These companies are largely unaffected by economic conditions as they provide products that are regularly purchased by the consumer in both good and bad times. As a result, this sector has proved to be a very strong performer over the last 40 years – between 1968 and 2009 the sector was the best performing sector and recorded returns of 13.6 per cent per annum. This sector should continue to do well as a growing and more affluent population consumes more of these products. The legendary investor Warren Buffett is a big fan of companies in this sector.
In addition to having strong growth prospects, both these sectors are less volatile than the overall market and other sectors. For example, in the market crash of 2007 to 2009, the consumer staples sector fell 32 per cent versus 56 per cent for the overall US market. Furthermore, the consumer staples sector has fully recovered these losses and is now trading 20 per cent above the highs of 2007 while the overall US market is still 10 per cent below the high of 2007.
The sensible way to invest in these sectors is through exchange traded funds (ETFs), which seek to replicate the performance of the sector. For example, an ETF that follows the healthcare sector achieves this by investing in a basket of healthcare stocks, weighted by market size. Alternatively, you could invest in a small number of healthcare stocks but it is very difficult for a private investor to pick the winners – there is a risk that you could pick the wrong healthcare stocks. Going the ETF route ensures that, if you are correct about the healthcare sector, you will benefit.