The unconventional opportunity in Emerging Market healthcare

As active fund managers, our objective is to deliver alpha for our clients. We aim to achieve this through a disciplined investment process focused on identifying winners – fundamentally good companies with a large upside potential – whilst avoiding losers – companies that might initially benefit from bubble market conditions that eventually lead to significant price drawdowns. Over our many years of managing portfolios, we have witnessed multiple market cycles, including periods of exuberance (bubbles) that ultimately gave way to significant drawdowns (bursts).

Following the exceptional performance seen in AI-related stocks over the past years, reaching new record levels in some areas, there are growing signs that parts of the market may be exhibiting bubble-like characteristics. Although we have benefitted from several of these big winners, particularly among the so-called “picks and shovels”, mostly in Korea and Taiwan, which profited from the sudden increase in demand, we remain disciplined and selective. We are prudent and avoid names that ride the “AI wave” while lacking fundamental drivers, but instead we focus on actively exploring other sectors and themes that may offer diversification from potential AI-related risks. Through our unique “dual growth philosophy” and robust investment process, we have identified several interesting options we outline below.

US vs EM

One sector in the US has stood out. Despite not being related to tech or AI, it has managed to beat Nasdaq both year-to-date and over the past year: it is the US biotech sector (see Chart 1). The divergence between developed and emerging markets is noteworthy. Whilst US biotech has enjoyed a period of strong outperformance, the emerging counterpart has lagged the wider emerging markets: the MSCI Emerging Market Health Care Index has consistently underperformed the general MSCI Emerging Market Index over the past few years (relative underperformance of 41% over the past year, please see Chart 2).

Causes of sharp underperformance?

1. Macroeconomic and fundamental factors: Higher US tariffs and increasing regulatory uncertainty have weighted on emerging market pharmaceutical manufacturers, many of which are export-oriented. These pressures have been exacerbated by the US dollar weakness and the sector’s significant exposure to the US, which remains the largest destination for many emerging market pharmaceutical companies.
2. Technical and flow-related drivers: As mentioned previously, over the past couple of years, global equity markets have been dominated by the AI frenzy. The spectacular performance of technology stocks has attracted significant capital flows, often at the expense of other sectors. Emerging market healthcare, and especially biotech, have been among the main sources of these funding needs. Emerging market biotech companies are mostly concentrated within East Asia (China, South Korea and Taiwan), the same countries that led the tech and AI rally. As investors increased exposure to AI-related opportunities, capital flows were often redirected away from healthcare and biotech, contributing to these sectors’ underperformance.

Where do we stand now?

We have been underweight the healthcare sector over the past 3 years, for the above reasons among others. However, we are finally starting to see positive signs:

• We believe that the pressure from higher US tariffs and geopolitical uncertainty has already passed its peak. Furthermore, the pause in the slide in the US dollar is also becoming supportive for the sector.
• From a fundamental perspective, an increasingly positive driver is the quick advance in development of GLP-1 products against obesity and diabetes. The market for GLP-1 products within emerging markets significant. The use of GLP-1 within emerging markets was often initially led by the well-known western brands (such as Ozempic and Mounjaro) but the key limiting factor has been relatively high pricing. The local pharmaceutical producers are increasingly bringing more affordable alternatives to market.
• Finally, we are starting to see signs of improved investor sentiment towards the healthcare and biotech sectors within emerging markets. As the technology rally has begun to lose momentum, we have seen inflows into these sectors. Healthcare and biotech sectors are the perfect fit for growth investors starting to look for less extended alternatives.

We have started to increase our exposure to the healthcare sector. One of the most direct beneficiaries of this improving backdrop is the Indian manufacturing sector. Within this space, we have a preference towards names with significant exposure to the domestic market instead of pure exporters (given the low penetration rate of the domestic Indian pharmaceutical market) and manufacturers moving up the value chain, as these have higher added value.

Another beneficiary is the pharmaceutical manufacturing sector in Africa. This market remains substantially under-penetrated. In particular, the untapped GLP-1 opportunity looks attractive. We have also seen increasing signs of M&A activity within the African pharmaceutical space over the past several months, unlocking a new source of upside potential. An improving macroeconomic backdrop, including marked reduction in power outages and currency stabilisation, have positively impacted the healthcare sector within South Africa in particular.

The bottom line

As capital crowds into AI, one of emerging markets’ most compelling long-term opportunities may be hiding in plain sight: healthcare. The strong focus on AI and technology has left the emerging market healthcare sector overlooked, despite improving fundamentals and compelling valuations. After years of underperformance caused by macro pressures and capital outflows, we believe the sector is at an inflection point, supported by easing headwinds, improving sentiment and wider adoption of GLP-1 therapies. In line with our dual growth philosophy, we are selectively increasing healthcare exposure, focusing on companies with strong competitive positions and long-term growth potential. We see attractive opportunities in pharmaceutical manufacturing in India and Africa, where improving macroeconomic factors, structural demand, innovation and market expansion could drive returns while providing diversification from increasingly crowded AI-related investments.

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RISK CONSIDERATIONS: The strategy invests in international and emerging markets. International investments involve special risks, including currency fluctuation, lower liquidity, different accounting methods and economic and political systems, and higher transaction costs. These risks typically are greater in emerging markets. Such risks include new and rapidly changing political and economic structures, which may cause instability; underdeveloped securities markets; and higher likelihood of high levels of inflation, deflation or currency devaluations .

The views expressed are those of the portfolio manager as the date of posting, are subject to change, and may differ from the views of other portfolio managers or the firm as a whole. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. 

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Past performance is no guarantee of future performance. The value of an investment and the income from it can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested .

Investing in companies in emerging markets involves higher risk than investing in established economies or securities markets. Emerging markets may have less stable legal and political systems, which could affect the safe-keeping or value of assets .

Investments may include shares in small-cap companies and these tend to be traded less frequently and in lower volumes than larger companies making them potentially less liquid and more volatile .

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