Time to consider healthcare

USA

Although 4Q earnings reports generally did not disappoint,
the outlook comments given by leading technology
companies provided investors reasons to take profit.

Intel, IBM and Microsoft all could not forecast a robust technology spending recovery some had been looking for. Technically, after failing to break through previous resistances, the DJIA appears poised to consolidate in the short term.

As markets appear to be entering a consolidation phase, we favor focusing on stocks that offers defensive characteristics. The potential dividend tax cut would likely benefit stocks with high dividend yields. Drug and defense stocks should also be supported due to their positive earning visibility.

Healthcare service stocks had outperformed the market
significantly since the technology bubble burst in 2000 until a Medicare outlier payment scandal of Tenet Healthcare that send major healthcare service stocks tumbling. The incident created concerns over the long term Medicare pricing outlook.

Also, the expanding fiscal deficit situation created concerns of a potential Medicare spending 'push back'. However, aside from the political issue and after dropping more than 30% in the past two months, we believe healthcare service stocks are attractive.

While demand is expected to increase, capacity has not expanded. Actually, the number of bed has consistently decreased since the 80s, driving the occupancy rate to above 65% from 60% four years ago. 75% occupancy rate is generally considered as the practical maximum.

The tight capacity has allowed hospitals to raise reasonable price increases; especially, commercial rates have been increasing steadily in the last 4 years after dropping steadily in the early 90s. The positive pricing trend has enabled hospital operators to generate expected long-term average growth of 5-7% in revenue and 15-18% in profits.

Europe

European stocks fell sharply last Friday led by technology
stocks after Microsoft and IBM said a recovery in demand for software and computers isn't imminent.

The strong Euro against the dollar appears to have a negative impact on companies that derived much of their revenue from the North America in the form of translation effect.

In general, the healthcare and food retailing sectors appear most exposed to North America. For example, GlaxoSmithKline, Delhaize and Ahold get more than 50% of their revenues from the North America.

Japan

Japanese markets rose last week led by strong performance in bank shares. Merrill Lynch's 100 billion Yen investment in a bad-loan-disposal unit of UFJ and Goldman Sachs' 150 billion Yen investment in Sumitomo Mitsui Financial Group helped improve investors' sentiment towards bank stocks, which are expected to outperform in the near term.

However, the strengthening Yen against the dollar has created concerns over the competitiveness of Japanese exporters. The yen has advanced 6% in the past three months and rallied to a fourmonth high of 117.64 per dollar earlier last week. That's about 4.5% stronger than what large manufacturers are expecting for the fiscal year ending March 31, according to a Bank of Japan survey.

In terms of supply/demand outlook, the typical crossshareholding sales towards March may be worrisome but other factors may help offsetting this concern. In the past ten years, foreign investors have been net purchasers during the January-March quarter.