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2006 A Vintage Year

This Review looks at the performance of the global economy and markets in 2006 and implications for the health sector.

The bulls stole Wall Street last year, driven by a splurge in deal-making.

The total value of the world's financial assets — including equities, private and government debt securities, and bank deposits — grew faster in 2006 than the historical average rate, climbing by 17 percent to reach $167 trillion according to McKinsey & Company.

Spurred largely by equities, this growth in financial assets also outpaced growth in global GDP. Meanwhile, cross-border capital flows climbed to a record $8.2 trillion.

Alternative investments - hedge funds, private-equity funds - now total 3 trillion according to J.P Morgan Securities. Corporate debt defaults in the US reached a record low of 1.2 billion.

In this environment where investors were riding "cash" rapids, many looked to the emerging markets which ended up increasing 230% from lows in 2003.

BRIC Became a Household Word

Goldman Sachs economists coined the term "BRIC" for leading developing market economies - Brazil, Russia, India, and China.

Research indicated that these four countries could become larger than the world’s six most developed countries in the next 40 years.

Despite criticism decrying this prediction as “crystal ball gazing”, the notion of BRIC has captured the international investment community's imagination. It provides an intriguing glimpse into a world no longer dominated by U.S., European, and Japanese interests, while altering the economic landscape for the next generation.

As is often the case, the health sector is already leading the way in this respect. India has one of the largest pharmaceutical industries in the world, exporting drugs to both developed and developing markets. Its call centers are used by in the health industry just as it is by other sectors of the economy.

Its largest private hospitals can give even top centers in the US a run for their money in terms of clinical outcomes. And with 350 million middle income people seeking a higher standard of care than can be provided through the publicly subsidized National Health Service, the private health insurance market is expanding rapidly.

Although the context is different, the story for China is similar. Its pharmaceutical production has expanded rapidly during the past decade. Being one of the last sources of cheap labor, China can undercut the price of manufacturing goods and consumables in most or the rest of the world. The share of the population who have private health insurance remains one of the lowest in the world. Yet, China has the largest private health insurance market in the word.

The Brazilian health care system continues to be turbulent. Although the SUS (Sistema Único de Saúde) should provide equitable healthcare to all Brazilian citizens, provisions under its charter outstrip the realities of fiscal space allocated to health. The private sector is a vibrant part of the service delivery system, it has a strong pharmaceutical manufacturing sector, and there are several successful private health insurance systems.

Russia belongs to this group but a closer look at its political and economic peculiarities call into question its membership with this exclusive group of "breakout industrializing countries.  Russia's growth is based on (and limited by) quite different factors than exist in Brazil, India, and China.

As a result, the Kremlin ends up loooking less interested in opening Russia's economy to market forces than in leveraging the country's enormous resource wealth to consolidate state control over Russia economy. This has led some to re cast the group as BIC (Brazil, India and China), leaving out the R for Russia.

Beyond BRIC Towards New Merging Markets

Although characterized by less “buzz” than the billion populated BRIC, a new group of countries have emerged as promising emerging markets. This includes Egypt, Mexico, Poland, South Africa, South Korea, and Turkey.

They may not have the buzz of billion-plus population markets, but their growth is impressive – growth opportunities in the health sector of these countries may offer investors superior value. These six leading non-BRICs are notable for their strong growth profiles, fast-track reform agendas, and investor-friendly climates.

Eastern Europe, from the Baltic to the Balkans, is likewise blossoming thanks to reforms put in place after the collapse of the Iron Curtain. Unlike the largely export-dependent BRICs, most of these countries are prospering chiefly on domestic demand from surging consumer spending.

They do not suffer from India's volatile equity market, mainland China's disclosure paranoia, Brazil's hostile political environment and Moscow's penchant for interfering with private business. And the stars of the past - the Asian Tigers - have not been able to reinvent themselves.

Stellar Performance

Egyptian stocks were up 14 fold since 2003. Stocks in Brazil, South Korea and Russia have become mainstream holding for emerging market mutual funds. New money reached US$22 billion

The new "frontier markets" became Bangladesh, Cote d'Ivoire, Jamaica, and other countries in Africa, Asia, Eastern Europe and Latin America. Vietnam is already pricy.

Such frontier markets appeal to investors in developed countries seeking undiscouvered stocks. Demand has also come from the new burgeoning economies of China and India for commodities and natural resources found in South America and Africa.

Who's Who in this Expanding lineup based on the S&P/IFC Frontier Index:

Country Returns in %

Namibia 126.2
Romania 87.2
Ukraine 76.7
Botswana 64.9
Bulgaria 62.2
Lebanon 56.2
Slovakia 51.7
Jamaica 48.7
Bangladesh 48.3
Estonia 39.0
Trin&Toba 34.8
Latvia 33.3
Croatia 32.5
Slovenia 32.4
Lithuania 15.5
Ecuador 14.2
Kenya 13.0
Vietnam 2.1
Mauritius -4.8
Tunesia -8.0

Such frontier investments are good if the stocks are cheap and overlooked. In the bigger emerging markets stocks have already been picked and prices have gone up.

Contact details

Alexander S. Preker

Health Investment & Financing
14 Wall Street, 20th Floor
New York, NY
United States of America

Office: 1 (212) 348-1866
Cell: 1 (202) 667-8286
Fax: 1 (212) 348-2866

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  January 01, 2007