This edition starts with new investment ideas allowing investors to profit from defossilization and moves to an explanation for why the last two weeks of September are historically the most dangerous for markets. The diversion is more of a potential real life health-care horror story and we then look to a raft of important economic events happening for the rest of the week.
Investment ideas
Options for climate-sensitive investors
Francisco Blanch, commodity and derivative strategist at BofA Securities, has been a prominent analyst covering fossil fuels and industrial metals. Like developed world economies though, Mr. Blanch’s focus is evolving as evidenced by his summary of the recent BofA energy transition conference, which included an ETF-heavy, four-part list of ways to invest in decarbonization.
The strategist began his report by warning that the easy part of CO2 emission reductions is over as global utilities have shifted away from thermal coal. The next stage will involve energy intensive sectors like steel, cement and paper moving to renewable power.
Mr. Blanch provided a highly useful chart (see below) showing global oil demand by sector. Passenger vehicles account for about 26 million barrels per day, road freight about 15 million and aviation and shipping accounts for 10 million
BofA sees biofuels made from waste oils, fats, greases and other biomass making substantial inroads, particularly in aviation. Ammonia is a potential energy source for maritime use. I learned two new acronyms to add to my vast collection – SAF (sustainable aviation fuel) and RD (renewable diesel).
As for examples of investing vehicles, Mr. Blanch started with the U.K.-traded L&G Energy Transition Commodities UCITS ETF. This fund is split into three parts. One invests in the commodities most associated with the energy transition like copper, aluminum, lithium, cobalt, tin and silver. The second segment involves transition fuels like ethanol and natural gas. The third section is carbon credits.
The next example is the U.S. ETF WisdomTree Battery Value Chain and Innovation Fund (WBAT-A). The fund invests in 100 companies involved with the production of batteries, including components.
The third idea is a bit smoke and mirrors. It involves avoiding direct investment in fossil fuels by trading futures. It also, however, includes the idea of investing in virtual natural gas trading houses (Title Transfer Facilities) and carbon credits.
The fourth concept was one developed by Mr. Blanch himself. Step one of the process is, starting with conventional commodity benchmarks, re-weight them to minimize the carbon footprint within sectors by emphasizing lowest footprint producers. The second step is to overweight metals and increasingly underweight fossil fuels over time by using International Energy Agency renewable power projections.
Not all of Mr. Blanch’s investment ideas are easy to implement but it does help open investor eyes beyond the ‘buy copper, ignore oil’ strategy for climate change-sensitive strategies.
Traders work on the floor of the New York Stock Exchange.Jeenah Moon/Getty Images
Markets
We are entering the worst two weeks of the year
Goldman Sachs Briefings newsletter explained why there is no two-week period with a worse performance history for the S&P 500 than the latter half of September. More specifically, poor returns have typically occurred during the last 11 days of the month – since 1928 the median return is negative for 10 out of those 11.
Goldman Sachs’ Scott Rubner from the Emerging Markets Ex-Asia Derivative Sales and Macro Execution team blames market liquidity for the seasonal pattern. For one, U.S. corporate share buyback programs are halted because of blackout regulations ahead of earnings season.
Pension funds also tend to reduce risk at the end of the third quarter, reducing equity allocations in favour of investment grade corporate bonds. Pension experts at Goldman estimate that U.S. pensions are currently 103 per cent funded, increasing the likelihood of locking in their fully funded status by de-risking.
Policy uncertainty ahead of the U.S. presidential elections could exacerbate the risk reduction trend this year.
Diversions
Unsettling COVID/Dementia connection
I read a book called Blindness by Nobel Prize winner José Saramago a long time ago. The premise involved an inexplicable plague that caused blindness in a significant percentage of the population, enough to overwhelm civilization more or less. I didn’t love the book to be honest but it was the first thing I thought of when reading a Bloomberg report suggesting Covid-19 could eventually cause a wave of dementia.
Given the current state of health care in Ontario, creaking under the weight of a growing population, the report was terrifying. I haven’t been this unsettled by a health-related story since a friend mentioned that the U.S. Army probably has a CRISPR machine.
The essentials
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Globe Investor highlights
Tim Shufelt argues investors need to stop treating their homes as an investment.
Canadian National Railway last week lowered its profit estimates for this year. David Berman explains how this translates into a buying opportunity.
Rob Carrick suggests this three-step plan to position your portfolio for the U.S. election (and so much else). Rob also shares some thoughts on whether a reader should dump her adviser.
Confidence is building among market watchers that gold could soon see US$3,000 an ounce.
What’s up next
This is a busy week for important data. Domestically we have CPI for August tomorrow, where 2.1 per cent year over year is expected, down from last month’s report at 2.5 per cent.
Retail sales, my pick for the most important domestic economic report because it will provide early signs of rate-related household financial stress, is out Friday. A month-over-month increase of 0.4 per cent for July is forecasted. Industrial production for August will also be released Friday.
The Fed meeting on Wednesday is the big event in the U.S. As of late Monday morning, markets are putting 61 per cent odds of a hefty 50 basis point cut, and 39 per cent odds on a quarter point cut, according to LSEG data as well as the CME FedWatch tool. The Americans will also get Industrial Production data for August on Tuesday.
See our full economic and earnings calendar here (You can bookmark the page - it gets updated weekly)