Alternate Universe - Monthly Roundup
Owen Zammit
MBA Candidate - University of St Gallen '25 (HSG) | Ex Foodtech VC Analyst | Life sciences background
Welcome to Alternate Universe, a newsletter written by me, Owen, where I go down rabbit holes on the the latest investable trends, asset classes & technologies.
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1. Scorching gains with heatwave trades
The world is getting hotter.
Between March and May, India registered at least 60 deaths due to heat-related illnesses. This alarming trend will continue unless we meet our 2030 emission goals.
Last year saw the highest global temperatures recorded since the start of the industrial age. There is an 80% likelihood that the annual average global temperature will temporarily surpass 1.5°C above pre-industrial levels at least once in the next five years.
Having worked in impact investing, I understand the significant efforts required to achieve these goals. However, I will not focus on the long-term investments necessary to reach these targets in this issue.
Instead, I want to highlight a few stocks that could benefit from the recurring and intensifying summer heatwave trend.
Profit over purpose? ??
Sometimes, it's not just about saving the world—it's also about enjoying an extra scoop of ice cream.
Certain industries are negatively impacted by heat anomalies.
In a recent study by Amir Hosseini, which investigated the impact of heat anomalies on financial performance, both the transportation and hospitality industries were found to underperform.
Presumably, dragging a whole family across Disney World in 40-degree heat is far from appealing. ??
On the flip side, I wanted to answer a simple question.
Which stocks would do well in a heatwave?
Basically - what do we do more of in summer?
I broke these down into 3 buckets
The rules are simple
Vamos
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Bucket #1 - Keep Cool???
Trane Technologies (NYSE:TT)
Market cap: $74.98 B
I believe the clearest opportunity lies in HVAC companies.
In addition to the heatwave thesis, companies like Trane and Carrier are also benefiting from AI tailwinds. Data centers, especially with the introduction of AI chips that generate significant heat, have substantial cooling needs.
The combination of these two markets presents a unique opportunity for HVAC companies.
Trane, in particular, has outstanding financials. The company has consistently grown its revenues, operating margins, and ROIC while maintaining low debt levels. I believe this can also be a longer-term play in one’s portfolio, and I already own a small portion of my portfolio in Trane.
2. The rise of Dry January
At the beginning of this year, I decided to take a break and kick off 2024 with a good habit — Dry January.
Although I had previously taken breaks from drinking alcohol socially throughout the year, I felt that nothing compared to the reset offered by Dry January.
Fueled by this new enthusiasm, I delved into a new rabbit hole.
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领英推荐
Trends ??
As it turns out, search volumes for non-alcoholic beverages (NAB), have been growing steadily over the last few years, especially within Millennial and Gen Z populations.
Health ????
Younger generations are becoming more mindful of their drinking habits for two key reasons:
As a science grad, I was aware of the dangers of binge drinking. More surprising was the hidden effect of low but continuous alcohol consumption. This subtle pattern of drinking proved to be a Trojan horse to my health, causing grogginess, irritability, and persistent brain fog.
For a long time, moderate alcohol consumption (1-2 drinks/day) was touted as beneficial. However, studies failed to clarify if moderate drinking directly improved health or was simply a reflection of the affluence and better health of those who could afford to drink moderately.
Two separate studies in Israel and New Zealand challenged this notion. The first study observed participants consuming one standard drink daily for two years and found no significant health benefits, with potential risks, including cancer, possibly taking years to manifest. After accounting for socio-economic status, the second study revealed that the perceived health benefits of moderate drinking vanished entirely.
Market ??
The no/low alcohol drinks market is estimated to be worth $13 billion and is forecast to grow at a 6% CAGR until 2027. The market is broadly divided into three categories, with non-alcoholic beers leading in both the US and Europe, followed by non-alcoholic variants of wine and spirits.
Wine is better suited to the low-alcohol segment rather than the no-alcohol segment. Removing alcohol from wine significantly impacts its sensory quality due to its higher ABV compared to beer.
Non-alcoholic spirits occupy a unique niche. Unlike beer and wine, their production usually involves adding aromas to a non-alcoholic base liquid, enhancing mocktail selections.
While the market outlook is promising, it faces a few challenges. One is the limited beverage selection available to patrons while dining out, coupled with taste issues. Despite being pricier, customers are willing to pay more for these drinks, as evidenced by trends in the beer category.
3. How to spice up your portfolio
In the previous issue of Alternate Universe, I introduced the newsletter and its focus.
Today, we’ll dive deeper into the world of alternative investments. We’ll compare these to traditional investments, such as the good old 60/40 portfolio, discuss the benefits they offer, and explain why now is the perfect time to explore these opportunities.
Let’s dive in! ??
The 60/40 Portfolio
What is it?
The 60/40 investment approach is widely recognized for balancing risk and return. This strategy allocates 60% of your investment to stocks for growth opportunities and the remaining 40% to bonds for income generation and reduced volatility.
Introduced by Nobel laureates Harry Markowitz and William Sharpe through their work on Modern Portfolio Theory, the 60/40 strategy quickly became a benchmark for diversification.
One straightforward implementation of the 60/40 strategy is to invest in a mix of the Total US Stock Market and Total US Bond Market. ETFs like VTI and BND will do the trick for US-based investors.
So how has this strategy performed over the long term?
Pretty damn well.
A €10,000 investment made in 1985 would have grown at a compound annual growth rate of 7.28%, resulting in a total of €152,457 by 2023.
Not only has the 60/40 strategy provided spectacular returns, but it has also done so with lower risk. Over the same 38-year period, its Sharpe ratio was 0.71, compared to 0.51 for stocks and 0.48 for bonds.
What’s wrong?
Why are we even here debating the 60/40 when it’s doing what it says on the tin?
The 60/40 portfolio offers reliable returns with less risk compared to a stock-only portfolio.
However, the financial media has been sounding alarm bells for years, and the strategy's dismal performance in 2022—with a decline of 17.9% (its worst since 2008)—has only intensified these concerns.
Several factors contribute to the increasing warnings against the 60/40 strategy.
An inflationary environment tops the list, as higher inflation impacts both components of the 60/40 portfolio in different ways. Higher interest rates reduce companies' ability to borrow money and drive down bond prices. Furthermore, this simple strategy does not include other financial instruments that typically offer some inflation protection.
Critics argue that the remarkable returns seen in the 60/40 strategy can be attributed to the disinflationary period between 1981 and 2021. While this period certainly boosted returns, it’s important to note that the pre-1981 era also saw positive returns for the strategy.