Future Returns: Opportunity in Global Healthcare
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Future Returns: Opportunity in Global Healthcare

Strategists at Citi believe the sector is inexpensive and worth a look.

By Abby Schulz
Fri, May 14, 2021 11:25amGrey Clock 4 min

The shares of healthcare companies often aren’t the first to take off when the economy recharges, but strategists at Citi believe the sector is inexpensive and worth a look.

Citi Private Bank shifted a recommendation that investors overweight their stock allocation to global healthcare by 2% to 4% in late April. That means healthcare now represents half of the bank’s recommended 8% overweighting to global stocks, making it a substantial bet.

Typically healthcare “is a more defensive asset,” says David Bailin, chief investment officer and global head of investments at Citi Global Wealth. But the bank is making this bet because “healthcare looks unusually cheap.”

Shares in healthcare companies have risen only by 15% since the end of 2019, including a 5% gain for the year through mid-April—a significant lag to the double-digit gain in the S&P 500 in that time period, according to Cit Private Bank’s April 22 global strategy report. These subdued gains are despite a valuation discount of 25% to the broad S&P 500 index, Citi said.

Also, in the U.S., the sector trades at a 30% forward price-to-earnings ratio discount to the S&P 500, the bank said.

Some of the relative drag on the sector could be related to worries about potential regulation. Proposals mentioned since the Democratic primaries have included regulation of drug prices and an overhaul of the U.S. insurance system, Bailin says.

But, he adds, “talk about actual legislation so far includes increased subsidies to fund long-term care as well as enhancements to the Affordable Care Act subsidy regime—not cutbacks.” There’s also no call for healthcare reform.

“Given that we see the Biden proposal as a ceiling, not a floor, to what can actually be passed in the current Congress, we view the odds of major healthcare regulation that would constrict the growth of healthcare revenues as lower than what the market is currently pricing,” Bailin says.

The reason to tilt to healthcare is to gain exposure to global growth, exposure to stocks with high dividend yields, and exposure to what Citi views as an “unstoppable trend”—the demographic shift within many countries to older populations that have the money to spend on the healthcare they increasingly need.

Penta recently spoke with Bailin about where the opportunities in healthcare are.

Why Is Healthcare Undervalued?

Healthcare historically trades at a lower valuation to the market, but always at a correlated lower valuation. Since the market bottomed in March 2020, however, stocks have been driven to lofty levels by growth sectors, such as technology—a trend that stumbled on Monday as the Dow sank 500 points.

But during this period, over the last 15 months, healthcare stocks “did not inflate,” Bailin says. Their valuations remained “within a channel of normality,” yet relative to everything else, they’re “under-appreciated,” he says.

One interesting note about healthcare is that the sector hasn’t ever had a down year in revenues or earnings—even during the years of the financial crisis, 2008-09—since the late 1980s. “How much would you pay for that consistency? Right now, you’d pay a lot,” Bailin says.

Also, the bank’s strategists note in the April report that the sector has not been a bad place to be when markets slide. “Healthcare has historically fallen the least among market segments during corrections,” the report said.

Which Sectors to Focus On? 

In terms of specifically where to invest, Citi wrote that “the long-term case” for spending on healthcare “rests on aging demographics, rising income levels in emerging market countries, and tremendous innovation in vaccines, gene therapy, med-tech, wearables, Alzheimer’s treatments, and much more.”

One company that will benefit from current demographic shifts, for instance, is San Diego-based Dexcom, which develops, makes, and distributes monitoring systems for diabetes.

Biotechnology and biopharmaceutical companies also should benefit, given the important role these companies play in drug discoveries and treatments.

To capture global growth—and high dividend yields—Citi recommends companies such as Chicago-based biopharmaceutical AbbVie (with a 4.5% dividend yield), and companies listed on exchanges outside the U.S., where stocks are slightly less expensive, Bailin says. An example of the latter is Paris-based multinational pharmaceutical company Sanofi, which also has a high dividend yield of 3.7%.

Citi also likes companies creating healthcare delivery systems, such as telehealth—services that allow patients to interact virtually with their health-care practitioners.

“There are a whole bunch of companies that are changing the delivery modality to moving away from the hospital and away from the office,” Bailin says. “We think this will happen with many sectors.”

Also worth a look are companies involved in medical devices, robotic surgery, or “anything that creates better decisions,” he says.

Intuitive Surgical, for example, is the leader in robotic-assisted surgeries, Bailin says. It “continues to expand into new surgical indications, and the [total addressable market] is enormous.”

In the wake of the pandemic, Bailin expects some pharmaceutical companies and companies focused on physician-administered therapies and vaccines will get a boost temporarily as people return to the doctor for the first time in more than a year.

“Instances of disease are lower, but it doesn’t mean they actually are lower—they are just not reported,” Bailin says. “We have a bunch of catch-up over the next 12-to-24 months to [get] back to baseline interaction with healthcare providers.”

New Jersey-based Merck, for instance, could benefit “given that its oncology and vaccines are a significant percentage of revenue,” he says.

What About Technology? 

While the technology sector had a bad day on Tuesday as the market rotated out of growth stocks, investors may not be ready to abandon hot tech names just yet. In announcing the tactical shift higher in healthcare, Citi noted that investors who followed their recommendation would still have plenty of exposure to technology.

Investors who follow Citi’s recommended 60% allocation to global stocks as defined by the investable MSCI All Country World Index will have 12.6% of their portfolio invested in technology, according to Citi. The recommendation to increase healthcare to a 4% overweight will lead to an 11.2% exposure.

“For decades the sector has carried some modicum of political and headline risk,” Citi wrote. “But that has yet to upend an enviable record of positive revenue growth. Steady revenue growth at a deep valuation discount is the type of script we like.”

Reprinted by permission of Penta. Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: May 11, 2021



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I.M. Pei was the confident visionary behind such transformative structures as the Bank of China Tower in Hong Kong and the Louvre Pyramid in Paris, but he was also humble, and for years resisted a retrospective of his work.

Pei, a Chinese-American architect who died in 2019 at 102 , would always protest any suggestion of a major exhibition, saying, “why me,” noting, too, that he was still actively at work, recalls his youngest son, Li Chung “Sandi” Pei. A decade ago, when Pei was in his mid-to-late 90s, he relented, finally telling Aric Chen, a curator at the M+ museum in Hong Kong, “all right, if you want to do it, go ahead,” Sandi says.

A sweeping retrospective, “I.M. Pei: Life Is Architecture,” will open June 29 at M+ in the city’s West Kowloon Cultural District. The exhibition of more than 300 objects, including drawings, architectural models, photographs, films, and other archival documents, will feature Pei’s influential structures, but in dialogue with his “social, cultural, and biographical trajectories, showing architecture and life to be inseparable,” the museum said in a news release.

As a Chinese citizen who moved to the U.S. in 1935 to learn architecture, Pei—whose full first name was Ieoh Ming—brought a unique cultural perspective to his work.

“His life is what’s really interesting and separates him from many other architects,” Sandi says. “He brought with him so many sensibilities, cultural connections to China, and yet he was a man of America, the West.”

Facade of the Bank of China Tower in Hong Kong in a photograph commissioned by M+ in 2021.
© South Ho Siu Nam

Pei’s architectural work was significant particularly because of its emphasis on cultural institutions—from the East Building of the National Gallery of Art in Washington, D.C., to the Museum of Islamic Art in Doha, Qatar—“buildings that have a major impact in their communities,” Sandi says. But he also did several urban redevelopment projects, including Kips Bay Towers in Manhattan and Society Hill in Philadelphia.

“These are all places for people,” Sandi says. “He believed in the importance of architecture as a way to bring and celebrate life. Whether it was a housing development or museum or a tall building or whatever—he really felt a responsibility to try to bring something to wherever he was working that would uplift people.”

A critical juncture in Pei’s career was 1948, when he was recruited from the Harvard Graduate School of Design (where he received a master’s degree in architecture) by New York real estate developer William Zeckendorf.

With Zeckendorf, Pei traveled across the country, meeting politicians and other “movers and shakers” from Denver and Los Angeles, to Philadelphia, Washington D.C., Boston, and New York. “He became very adept at working in that environment, where you had to know how to persuade people,” Sandi says.

During the seven-year period Pei worked with Zeckendorf, the developer fostered the growth of his architecture practice, supporting an office that included urban, industrial, graphic, and interior designers, in addition to architects and other specialists, Sandi says.

When Pei started his own practice in 1955, “he had this wealth of a firm that could do anything almost anywhere,” Sandi says. “It was an incredible springboard for what became his own practice, which had no parallel in the profession.”

According to Sandi, Chinese culture, traditions, and art were inherent to his father’s life as he grew up, and “he brought that sensibility when he came into America and it always influenced his work.” This largely showed up in the way he thought of architecture as a “play of solids and voids,” or buildings and landscape.

“He always felt that they worked together in tandem—you can’t separate one from the other—and both of them are influenced by the play of light,” Sandi says.

View of the National Center for Atmospheric Research, on the mesa, in a photograph commissioned by M+ in 2021.
© Naho Kubota

Pei also often said that “architecture follows art,” and was particularly influenced by cubism, an artistic movement exploring time and space that was practiced in the early 20th century by Pablo Picasso, Georges Braque, and the sculptor Jacques Lipchitz, among others. This influence is apparent in the laboratory at the National Center for Atmospheric Research in Boulder, Colo., and at the Everson Museum of Art in Syracuse, N.Y. “Those two buildings, if you look at them, have a play of solid and void, which are very cubistic,” Sandi says.

Yet Sandi argues that his father didn’t have a specific architectural style. Geometry may have been a consistent feature to his work, but his projects always were designed in response to their intended site. The resulting structure emerged as almost inevitable, he says. “It just was the right solution.”

Pei also intended his buildings “not only to be themselves a magnet for life,” but also to influence the area where they existed. “He never felt that a building stood alone,” Sandi says. “Urban design, urban planning, was a very important part of his approach to architecture, always.”

After he closed his own firm to supposedly “retire” in the early 1990s, Pei worked alongside Sandi and his older brother, Chien Chung (Didi) Pei, who died late last year, at PEI Architects, formerly Pei Partnership Architects. Pei would work on his own projects, with their assistance, and would guide his sons, too. The firm had substantial involvement in the Museum of Islamic Art, among other initiatives, for instance, Sandi says.

Working with his father was fun, he says. In starting a project, Pei was often deliberately vague about his intentions. The structure would coalesce “through a process of dialogue and sketches and sometimes just having lunch over a bottle of wine,” Sandi says. “He was able to draw from each of us who was working on the project our best efforts to help to guide [it] to some kind of form.”

The M+ retrospective, which will run through Jan. 5, is divided into six areas of focus, from Pei’s upbringing and education through to his work in real estate and urban redevelopment, art and civic projects, to how he reinterpreted history through design.

Sandi, who will participate in a free public discussion moderated by exhibition co-curator Shirley Surya on the day it opens, is interested “in the opportunity to look at my father anew and to see his work in a different light now that it’s over, his last buildings are complete. You can take a full assessment of his career.”

And, he says, “I’m excited for other people to become familiar with his life.”