Living off the fat of the land

19th July 2012

Obesity is the fastest growing medical problem in the world, dwarfing Aids and presenting higher whole life medical costs than smoking.

But as with tobacco where cigarette companies have been amongst the best share price bets over the past decade or so while anti-smoking devices and initiatives have also been profitable, there are investment opportunities from both the trend to greater weight and from combating it.

Transporting the fifty stone patient

This Michigan US firm is one that builds ambulances for the immensely overweight. Similar products are now seen in the UK  for patients weighing up to 300kgs (about 50 stone). And undertakers need special equipment  including supersize body wrappings, reinforced hearses and extra large cremation equipment at mortuaries. Yet media attention tends to focus far more on the relative few who suffer from anorexia.

As a term, bariatrics was only coined in 1965, since when the condition has grown exponentially. Now Bank of America has compiled a report listing a number of companies that could profit from the realisation that human weight is a health hazard.

The bank says "Globesity" – a worldwide epidemic – will "form an important new investment theme for fund managers." It adds: "This is a mega-investment theme for the next 25 years and beyond. Obesity may be the most challenging health issue facing the world today and efforts to tackle it will shape thinking by policy makers and boardrooms across the world."

The report estimates 500 million are obese (and a further 1.4 billion are overweight) as the world adjusts to less heavy labour, more motorised transport and relatively cheaper food, especially fats and sugars. The World Health Organisation estimates prevalence doubled between 1980 and 2008, tripling in Europe. And, by 2030, a further 65 million Americans will be obese if current trends continue. Obesity affects one in six Brazilians, one in five Chinese living in cities and one in four Russian women.

One in five healthcare dollars

In the US, the cost of obesity-related illness was recently estimated by the US Institute of Medicine at $190bn a year or 21 per cent of American medical spending, more than double previous estimates.  Obese people cost 40 per cent more to treat, a greater "premium" than treating smokers. If US medical policies excluded obesity-related problems, policy costs could be cut by a third.

It is clear which firms currently win from our growing growth – fast food outlets and junk food manufacturers, some of which – Coca-Cola, MacDonalds – are sponsors of the London 2012 Olympics. While there is pressure against them and their products with suggestions of fat and sugar taxes, investors should not discount their longevity.

Tobacco smokes well

Big tobacco has survived and thrived through half a century of anti-smoking efforts, often proving to be one of the best investment ideas around. Cigarette companies are spared many of the costs associated with advertising and with the expense of research and development. While increasingly legislated and taxed out from developed markets, these firms moved into developing markets where health considerations carry lower importance and where they are considered "glamorous".

Junk food could be similar – the likes of sugary drinks and fattening takeaway food have yet to penetrate emerging economies to any extent. When they do, their mix of "western status" and relatively low cost should push them into profitable prominence. These countries offer little health insurance, while greater regulation will often be ignored even if enacted.

It would be surprising – worrying from an investor point of view – if junk food firms did not have strategies including public relations to combat those advocating slimmer people. But fat fighters have to start somewhere – and the developed world will be the battle field of choice.

 The Bank of America research suggests investors look at four main areas to profit from the anti-obesity "megatrend" with its 25 to 50 year shelf life.

 Pharmaceuticals and healthcare:  This includes the growing research into "anti-fat" pills, increasingly supported by US regulator the Food and Drug Administration  as well as those offering facilities for the grossly obese such as patient lifts, stronger beds and extra large ambulances as well as treatments for diabetes, kidney failure and hip and knee replacements.  So far, drugs have mainly been noted for undesirable side effects.

Commercial weight control and loss.  Weight Watchers and the rest of the diet industry can rest easy for the moment as viable anti-fat drugs are some years away.  But with the potential size of the market, it is only a matter of time before a successful weight loss drug comes to a pharmacy near you. In the meantime, dieting, targeted nutrition and behaviour management are a $4bn a year business in the US alone.

Food.   The Bank of America basket of fifty stocks to take advantage of the "megatrend" includes sugary drink maker PepsiCo, presumably on hopes it will attract positive attention with new formulations.  This is a two way bet as the company could also expand into developing economies. There will also be a focus on how well food companies deal with increasing regulation and fat taxes.

Sports Equipment.  The report admits this is a "long term play". Governments have done little to encourage mass sport participation; in the UK, playing fields have been sold, swimming baths closed and local fitness facilities such as walking and cycling areas shut for months in the Olympic zone. Much equipment is made by specialist companies while the big clothing companies are vulnerable both to fashion and to attack when they use low cost or "slave" labour

The battle against obesity will be long. On the tobacco model, it takes a generation or two to change their dietary habits and perhaps another 30 to 50 years to move to a healthy lifestyle. But with cigarettes in mind, there may be swifter reactions from governments who stand to gain from fat and sugar taxes while saving on healthcare costs by tackling obesity-inducing lifestyles. 


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