Health Care: The Next Wave Of Innovation In China

In this issue of Trends Reinforced, the Emerging Markets Equity team reviews long-term healthcare investment opportunities in China.

Michael Lai, CFA

Michael Lai, CFA Portfolio Manager, China Equities Franklin Templeton Emerging Markets Equity

Elizabeth Wu

Elizabeth WuResearch Analyst, Healthcare Sector Franklin Templeton Emerging Markets Equity

COVID-19 has cast a spotlight on health care systems around the world, with China in particular attracting attention due in part to its relative success in virus suppression and leading role in supplying medical products globally. In some instances, trends already in place are being reinforced. Structurally, we see increased innovation emerging in the health care sector, similar to the dynamism that characterized the early days of China’s technology boom. We believe several forces are at play:

  • The right place: China’s health care demand is swelling alongside an aging population, growing lifestyle diseases, and rising incomes. At the same time, increasingly open capital markets are channeling funds to health care companies with rising research and development (R&D) spending.

  • The right time: The government is pushing for innovation, efficiency, and self-sufficiency in health care to meet mounting medical needs. Various policies are lowering costs, while also addressing product quality and safety.

  • The right people: China is drawing overseas-educated Chinese scientists and entrepreneurs back to its shores. High-profile returnees, coupled with an abundant pool of homegrown talent, are propelling domestic drug and medical device development.

In our view, these forces have aligned to create a compelling long-term health care investment environment in China, while in the near term, the pandemic is accelerating the process of localization. Governments globally are seeking to reduce reliance on complex foreign supply chains for essential health care products, presenting both opportunities and challenges for Chinese companies.

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What Are the Risks?

All investments involve risks, including possible loss of principal. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments; investments in emerging markets involve heightened risks related to the same factors. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments. China may be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and economic risks.