Here is a remarkable statistic. Health care was the best performing sector on the ASX in 2019, 2018 and 2017. Not only was it the best performing sector over the last three years, it was  also the best performing sector over the last five years, the last seven years and the last 10 years. Over this period, it has delivered an average annual return of 19.2% pa compared to the broader market’s 7.9% pa.

To put these numbers into context and to demonstrate just how big this performance difference is, $10,000 invested in the Australian share market at the start of the decade with dividends re-invested would have been worth $21,311 by the end of 2019. That same $10,000 if invested in the health care sector, with dividends re-invested, would have been worth $57,911 – almost three times as much!

And while it is mainly a CSL story, the global leader in blood plasma products and number two in influenza vaccines, Australia’s second largest company by market capitalization and soon to become Australia’s largest company, there are also other factors at play.

We have several world-beating health care companies. Cochlear with ear implants, Resmed with sleep apnea products and Ramsay Health Care with private hospitals in the UK, France, Scandinavia and Australia. Each operates globally, is highly specialised and focused within a fairly narrow product domain.

There are also the tailwinds that are driving healthcare expenditure by governments and individuals to increase at well above the long-term rate of economic growth. Demographic change through an ageing population is most often quoted, but there is a bigger driver from individuals demanding more health care services, as technology improves and community expectations around beauty, fitness and lifestyle change. The boom in cosmetic surgery,  knee and hip replacements are examples of the increased demand for health services.

The question for investors is that after so many years of stellar performance, can the momentum in the health care sector continue in 2020?

Proponents argue that as there is a dire shortage of ASX listed companies with both top and bottom line growth, investors don’t have many options but to look to companies such as CSL, Resmed or Cochlear. They say that the Australian market is changing and becoming  more like the US market, where revenue growth is valued more highly than bottom line profit growth. Further, the sector is now the third biggest sector on the ASX (having doubled in market weight over the last five years), and Australian fund managers can now no longer afford to be “short” the sector. The tracking risk is too big, meaning that even some income based funds are forced into holding CSL.

Opponents say that the Australian health care sector is very expensive compared to the US market and that some of our leading stocks are overpriced. They point out that according to S&P, the projected PE (price earnings ratio) for the Australian health care sector is 32 times, while the average for the US S&P 500 health care sector is 17.5 times (as at 31 December). Looking ahead, FN Arena says that CSL is trading a multiple of 43.8 times forecast FY20 earnings and 37.9 times FY21 earnings, Resmed is 38.2 times forecast FY20 and 33.7 times FY21 earnings, and Cochlear is 45.6 times forecast FY20 and 41.7 times FY21 earnings.

US healthcare companies are in the main far more domestically focused than those companies listed on the ASX (for example, CSL earns more than 90% of its revenue outside Australasia), or as specialized, so comparisons on this basis are a little fraught. But there are several global giants, such as Pfizer, Merck or Johnson and Johnson (the latter classified as health care, but also very involved in consumer products), which are trading on lower PE multiples.

Fifteen days into 2020, the Aussie health care sector is already going gang busters. Led by CSL (which is threatening to go through $300), the sector is up by 7.2%. While a correction is inevitable, my hunch is that this outperformance is going to continue, as investors are “forced” to load up on health care stocks. All good things, including trends, come to an end, but for the time being, I think this is still a case of “the trend is your friend”.