Ailing South African Health Stocks Suffer Under Weak Economy

JOHANNESBURG (Capital Markets in Africa) – Health-care companies have missed out on the best first-half for South Africa’s stock market since 2007.

An index of South African hospital operators and pharmaceutical companies has slumped 21% this year, the worst performance of any Johannesburg sector with more than three members, and lagging behind the 10% gain for the benchmark gauge.

Analysts and investors blame the weak local economy, which contracted by the most in a decade in the first quarter. Rising fuel and electricity costs are constraining disposable incomes, forcing consumers to choose between their health-care needs and other even more pressing concerns, according to Ron Klipin, a money manager at Cratos Wealth. For health-care companies, this means customer numbers have been declining, he said.

“We need to see greater GDP growth in South Africa, and especially growth in GDP per capita, before we see a turnaround in order to see an increase in disposable incomes,’’ Johannesburg-based Klipin said. “We also need to see more people joining health care groups to increase their numbers so that more patients can be treated in private hospitals.”

“We need volumes to drastically improve to offset the increasing costs of running these businesses,’’ said Casparus Treurnicht, a money manager at Gryphon Asset Management.

South African health care stocks have also underperformed their developing country peers — an MSCI index of 75 emerging market health companies has retreated 3% in the first half. The Johannesburg-listed companies have opened a wide discount to their emerging market peers, trading at about nine times estimated earnings for the next 12 months, compared with more than 22 times for the MSCI index, data compiled by Bloomberg show.

“The lower valuations relative to prior years may provide an opportunity for fund managers to start accumulating the shares that are currently out of favor and have the ability to rebound should the economic headwinds lift and regulatory pressures ease,” said Lester Davids, an analyst at Unum Capital.

Source: Bloomberg Business News