Global Market Commentary

October 06, 2016

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Healthcare and Global Demand Growth

Around the world, rising living standards are driving global demand growth for goods and services.  We have often written about the rise of new global middle classes as linchpins of this growth – particularly the nascent middle classes of China and India.  The rise of the Chinese, and perhaps in the relatively near future, the Indian consumer, one of the most significant macro trends for global investors.

A significant part of this global demand growth will come from healthcare.

The rise of middle classes drives healthcare demand for a number of reasons.  On one hand, rising living standards give birth to an aspirational mindset, particularly in the case of an economy like China’s where the political turmoil and repression and extreme privation that predated the reforms of the 70s and 80s are still within the culture’s living memory.  China’s new global consumers see what is possible, and have the financial means to demand it.  They will also slowly force political reforms.  India has not traveled as far down this path, but it is beginning to – groundwork is being laid by Prime Minister Narendra Modi’s reforms, as he streamlines bureaucracy and lays the foundation for the connection of India’s rural poor to modern financial and information systems.

In order to be accountable to these new global citizens, governments will also have to reform themselves, both to allow the private sector to grow, and to provide the level of social services which their citizens demand.  In China, this will ultimately be a matter of preserving the stability of Communist Party rule, as Xi Jinping has astutely observed.  It will mean, for example, reforming the system of hukou, which keeps migrants who come from the countryside to the cities from claiming government benefits.  Both China’s and India’s government spend below the developing-world average on healthcare as a portion of GDP, and growing that spending is a requirement for long-term political survival.

Source:  World Health Organization

India has further to go than China in this respect; while Chinese healthcare expenditure is growing about 1.3% faster than GDP, Indian expenditure currently lags GDP growth by 1.7%, so that it is currently falling as a portion of GDP.

Demographic Changes

Governments will increase spending on healthcare delivery and infrastructure, but demand growth will also occur for demographic reasons.

As populations become wealthier, they age, and they also adopt different lifestyle patterns of physical activity and diet.  These changes both mean that healthcare delivery shifts from a focus on acute conditions — contagious disease or trauma, for example — to chronic conditions, the so-called “diseases of affluence” such as neurological degeneration, cancer, cardiovascular disease, and obesity and its related co-morbidities, especially diabetes.  All of these conditions require much more consistent and expensive interventions than are typical for the rural clinics and dispensaries of India and China.  

Both India and China have growth as a political imperative to maintain stability, and both know that poor healthcare retards economic growth.  Sick workers, and citizens whose working lives are cut short by illness or incapacity, are drags on productivity growth — and untreated chronic diseases produce larger populations of dependent citizens.

Disease Burdens in India — Rising Due to Chronic Illnesses

NCD = non-communicable diseases

Source:  World Economic Forum

Many Indians and Chinese, especially the rural poor, will continue to rely on traditional medicine as they have for thousands of years; indeed Mao’s “barefoot doctors” relied on a fusion of traditional and simple modern medical education and were one successful aspect of his rule.  But as urbanization continues, the majority will demand western allopathic medicine.

Insurance and Finance

Hand-in-hand with obvious health infrastructure — physicians, nurses, hospitals, clinics, pharmaceuticals, medical consumables, and medical devices — the expansion of healthcare to the new global middle class will require a virtual infrastructure, particularly a financial one.  India especially lags in the development of private-sector health insurance, with extremely high out-of-pocket expenditures.

Source:  World Health Organization

In India’s case, the development of the infrastructure necessary to grow private health insurance and reduce out-of-pocket expenditures dovetails perfectly with the current government’s plans to integrate India’s poor into a streamlined, IT-based benefits program and into modern financial and credit systems.  

Investment implications:  Running beneath a lot of financial and economic reporting is an undercurrent of pessimism about future growth prospects.  In contrast, we note again the larger context and the biggest global economic story: the rise of a new middle class in developing nations, particularly India and China.  This vast cohort of aspiring consumers and citizens will drive global demand growth in the 21st century.  One of the primary avenues for this demand growth will be healthcare, as India and China invest in the sector to boost economic growth and fight against the diseases of affluence that are already beginning to afflict their citizens.  Particularly in India, financial and IT structures will both enable and benefit from the drive to include the poor in a nationwide system — boosting growth in other areas of the economy.