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Will the ASX healthcare shares outperform again in 2020?

Investors flocked to blue-chip healthcare stocks in 2019, which offered defensive cashflows and higher dividends. As a result, CSL Limited (ASX: CSL), Cochlear Limited (ASX: COH) and ResMed Ltd (ASX: RMD) delivered returns of 51%, 32% and 39%, respectively, for the year.

With an ageing population, the Australian healthcare market should see greater demand for age-related tests and treatments this year and beyond. So, is the healthcare sector poised to outperform in 2020?

Aged care expected to stall

The interim report into the aged care royal commission has analysts bearish about the performance of aged care operators in 2020 and beyond. According to analysts, operators like Regis Healthcare Ltd (ASX: REG), Japara Healthcare Ltd (ASX: JHC) and Estia Health Ltd (ASX: EHE) are already experiencing falling occupancy rates.

The interim report, released in October last year, highlighted that the aged care system requires a fundamental overhaul. According to the findings, the regulation and funding of the industry must be re-evaluated after failing to deliver safe and quality care for the elderly.

Despite the government increasing funding for hospitals, medicines and aged care in the 2020 budget, the funding is more focused on benefiting primary and home care for older Australians.

Companies to watch in the healthcare sector

The radiology and pathology industry could also stand to benefit from increased government spending and higher patient rebates. Sonic Healthcare Limited (ASX: SHL) could be a good pick for this sector given the company’s defensive earnings potential and underlying momentum from regulators. Sonic also has a pipeline of future acquisitions and boasts an attractive 3.1% yield for investors.

CSL continues to be the top pick for the healthcare sector, with many analysts classifying the company as the best in class operator with a conservative guidance. The company could face increased competition from rivals in the short term, however this should be a minor hurdle for CSL which has a market capitalisation in excess of $130 billion.

Australia’s largest private hospital operator, Ramsay Health Care Limited (ASX: RHC) could also be one to watch in 2020. The company saw positive growth in quarterly private hospital benefits last year, however future growth is dependent on contract negotiations on indexation. Analysts estimate that if growth rates continue into 2020, Ramsay could see earnings per share increase from $3.05 to $3.10. Ramsay has already reached an agreement with BUPA and remains in talks with other providers about the rates paid by insurers to hospitals. In addition, Ramsay’s expansion into mental health could see the company benefit from higher margins in 2020.

Foolish takeaway

In my opinion, the healthcare sector has so much going for it and is poised to outperform in 2020 and beyond. An increasing demand from an ageing population and growing developments in technologies gives the sector an exciting outlook, but the aged care sector has too many moving parts at the moment and biotech companies are trading at risky premiums. I would limit my scope in the sector to companies like CSL, Sonic and Ramsay that are on track for sustainable growth.  

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Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Cochlear Ltd. and CSL Ltd. The Motley Fool Australia has recommended Cochlear Ltd., Ramsay Health Care Limited, and Sonic Healthcare Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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