Are healthcare stocks worth their lofty valuations?

SINGAPORE (July 25): Heavyweight healthcare stocks have been among the best performing stocks in the market over the past few years, as operators of hospitals and other healthcare facilities ride a secular boom in demand fuelled by growing wealth and ageing populations across Asia.

According to DBS Group Research, the SGX All Healthcare Index has outperformed the Straits Times Index by 72% since 2012. These healthcare stocks have also proven to be resilient during big market selloffs. For instance, when the STI dropped 25% between April 2015 and January 2016 on concerns about the precipitous decline in oil prices and higher US interest rates, healthcare stocks fell only 5.2% while the market leaders in the sector dipped only 0.3%.

With such confidence in their prospects, the biggest healthcare players have been pushing ahead with new investments around the region. However, Maybank Kim Eng is now warning that some of these healthcare companies have not been earning a sufficiently high return to cover their cost of capital as they have pursued expansion in the region.

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