Macro Intelligence: Australian healthcare sector set for growth

Article written by Juliette Saly (ausbiz)

Healthcare sector's performance

The Australian healthcare sector has risen less than 3% over the past 12 months, but many analysts are confident of a better year of returns in 2024.

Shares in the index (XHJ) are currently trading above the 20-day moving average and are 6.7% above the 200-day moving average according to CommSec data, showing strength within a longer-term bearish trend.

Healthcare sector 2023 increase

20-day moving average

The impact of an ageing population

Population growth, particularly the growing ageing population, is a reason The Motley Fool reckons healthcare will start to outperform as more potential patients boosts revenue and earnings.

The tail-end of the COVID-19 pandemic is seen as a positive for the sector. Treatments that were delayed during the pandemic can now be undertaken, and operating theatres can perform at capacity. The healthcare sector's adoption of new technology and AI, which underpinned the tech sector’s outperformance in 2023, is expected to address issues such as staff shortages, burnout, patient safety, and care.

Healthcare sector's outperformance in 2023

Rates and inflation impacting healthcare

Risks to the healthcare outlook include the interest rate environment and higher costs to healthcare companies due to inflation. Healthcare stocks are typically seen as a “defensive” position amidst troubled economic times. Higher interest rates often lead investors to flock to the safety of bonds, which can affect the valuation of healthcare stocks.

The Ozempic effect on healthcare companies

The “Ozempic Effect” has weighed negatively on the outlook for some healthcare companies. ResMed, for instance, was targeted by short-sellers late last year due to concerns that a reduction in obesity might decrease demand for its CPAP sleep apnoea machines.

However, ResMed CEO Mick Farrell has consistently refuted these concerns, telling ausbiz recently “the rumours and the market were wrong.” In fact, ResMed reported solid earnings growth of 12.5% in Q2 to $1.16 billion amid its expanding global presence.

ResMed daily chart

ResMed’s financial performance 2021 - 2024

Investor sentiment in healthcare stocks

Most analysts are bullish on ResMed’s outlook, according to data collected by FNArena. Ord Minnett is most positive on the stock, with a price target of $39 per share, implying a 35% upside from its current price.

The company is also benefiting from a setback faced by its main rival, Dutch firm Koninklijke Philips NV (NYSE: PHG). Philips has announced it will not be selling its new sleep apnoea machines in the US market while it works to resolve an issue with the US Food and Drug Administration (FDA).

Citi expects this to be a positive catalyst for ResMed's earnings, forecasting compound annual revenue growth of 5% over FY23-26. Citi has a “Buy” rating and a price target of $34.

Analyst ratings and future projections

Stocks to watch

• CSL (CSL)

Market heavyweight CSL (CSL) was also impacted by the “Ozempic Effect” late last year. In October, shares hit a four-year low of $228. However, Citi maintains a “Buy” on the stock, with a price target of $325. It last hit an all-time high of $340 in 2020, and UBS believes it can reach this milestone again. CSL is set to report its half-year results on February 13.

CSL daily chart

Analyst ratings and future projections

• Sonic Healthcare (SHL)

Analysts are mostly upbeat on the outlook for medical diagnostics firm Sonic Healthcare (SHL), which has slumped around 8% over the last six months. Citi recently upgraded the stock to “Buy” with a price target of $33, while Macquarie has a “Neutral” rating, and Ord Minnett classifies the stock as a “Hold”.

Morgans, most bullish on the stock, has a price target of $36.55 and an “Add” rating. Morgans believes the company is well-positioned for growth due to cost reduction initiatives.

Sonic Healthcare daily chart

Analyst ratings and future projections

• Cochlear (COH)

Finally, hearing implant maker Cochlear has seen its share price rise more than 27% in the past six months. However, most analysts suggest reducing exposure to the stock as it might have increased too rapidly. Morgan Stanley recently downgraded the stock to “Underweight,” and Citi downgraded it to “Sell” from Neutral. Despite this, Citi's price target of $255 per share remains unchanged. Cochlear is due to post its 1H results on February 19.

Cochlear daily chart

Analyst ratings and future projections