Emerging markets investors often allocate to EM small caps for an opportunity to capture differentiated and uncorrelated returns, among other reasons. But in order to successfully execute on this potential, it also requires an ability to identify growth opportunities that may be flying under the radar. Trivalent Investments believes it has identified medical tourism as one such intriguing trend with a long runway of growth. Is your manager—or passive fund—positioning to take advantage of the medical tourism trend that may help power returns in emerging markets small-cap strategies?

Just Getting Started

Medical Tourism is a growing multi-billion-dollar industry, and investors can gain exposure to this under-recognized growth opportunity through an investment allocation to emerging market small-cap equities. Historically, medical tourism consisted of people traveling from less-developed countries to highly developed countries to seek medical treatment that is higher quality, less costly, or otherwise unavailable in their home country. As health care costs have skyrocketed and wait times for procedures have increased, medical tourism has grown to include patients from developed markets traveling to emerging markets. The industry is experiencing significant growth, and a substantial portion of medical tourism patients now seek treatment in emerging market countries. We believe the quality of medical services across many emerging market countries is dramatically improving, and people from all over the world are travelling abroad to seek care. According to our analysis, the MSCI® Emerging Market Small-Cap Index has nearly 3x more exposure to healthcare than the Standard MSCI® Emerging Market Index offers and more than 2x the exposure to the equipment & service providers that are benefitting the most from medical tourism.

As healthcare has become increasingly globalized and medical infrastructure in emerging countries has modernized, several emerging market nations have become destinations for foreigners seeking healthcare services. High costs of treatment and long wait times in home countries, coupled with a significant increase in the number of skilled medical professionals, has resulted in several emerging market countries seeing rapid growth in medical tourism. People are seeking out many different types of treatment, including chronic disease, cancer, dental care, and surgery (orthopedic & cosmetic). India, Malaysia, Thailand, Mexico, South Korea and Turkey standout as destinations for patients seeking treatment overseas. Here’s a snapshot of where some consumers might be looking for other procedures:

• Turkey is a leading destination for plastic surgery, known for its high-quality healthcare system and experienced surgeons.
• India is often targeted for cancer treatment, cardiology, and orthopedics.
• Malaysia offers fertility treatment, cardiology, orthopedics, and cosmetic surgery.
• Mexico is known for dental care, bariatric surgery, cosmetic surgery, and stem cell therapy.
• South Korea is a dental care, cosmetic surgery, stem cell destination.
• Thailand offers an array of dental care, cosmetic surgery, orthopedic procedures.

Savings Fuel Demand

Among other reasons, the demand trajectory for medical tourism looks to remain robust based on the rising cost of healthcare in developed nations, coupled with the strong potential for cost savings. It’s a powerful combination that’s likely to keep the trend viable for some time. We believe the potential savings patients can realize by travelling abroad are significant even when factoring in travel and lodging costs. Most internationally accredited hospitals and clinics offer a wide range of procedures at several different price points. In all cases, the costs pale in comparison to domestic procedures.

Source: Medical Tourism Association

Also constructive is the fact that several emerging countries have introduced legislation to support growth in medical tourism that encourages patients to travel from developed countries:

• In 2023, Thailand introduced a 90-day visa to allow medical tourists to stay longer than the standard 60-day visa.
• The Indian government has simplified the medical visa process, improving access for international patients.
• The Malaysian government offers an investment tax allowance for facilities that take in foreign patients and has established a travel council to coordinate collaboration and promote care offerings.

Elderly patients (60 and above) make up 25% of medical tourists (according to data from market.us), and as populations age and demographics change, this is only likely to increase. There is very little regulation with regards to medical tourism as governments view it as a potential source of economic growth and a means to improve access to health care and mitigate poverty.

In the end, we believe that any allocation to emerging markets small caps should recognize this outsized opportunity and, more importantly, be in a position to allocate to the right types of companies poised to grow earnings thanks to the burgeoning trend in medical tourism. This is an area of focus for Trivalent Investments.