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As killer heat waves grip much of the country this summer, the investor in you may wonder: Is there a market angle to this?
The question may seem crass. But it is not unusual.
Money managers hire climate experts to advise on market angles. A few hundred years ago, entrepreneurs profited by shipping New England pond ice to warmer parts of the globe.
“The value of being cool on a really hot day is enormous,” says Spencer Glendon, a senior fellow at the Woods Hole Research Center, which does climate science research.
Investors aren’t the only ones looking for angles. Even the Fed is working to shore up banks against potential economic shocks from extreme weather.
Read: How climate change could trigger the next financial crisis
It’s no wonder. Like many climate scientists, Glendon thinks global temperatures will march dangerously higher over the next two decades. Scientists cite growing levels of carbon dioxide. They think it acts like a greenhouse gas to trap in heat.
Unlike most climate scientists, Glendon — who has advised Wellington Management on climate change — also has some clear ideas about how to position your portfolio for higher temperatures.
“Ice is melting as we warm the world and it will surprise you how much this is going to matter in financial markets,” Glendon told participants at the Sohn investment conference in New York in May. “It’s already relevant, but it is going to matter a lot more very soon.”
Here are three investing tactics to consider.
1. Buy Sunrun
Glendon offers interesting themes below, but I’m going to start with a more targeted idea from my research for my stock letter Brush Up on Stocks. I follow insider buying and the activities of smart money managers — like Tiger Global Management — to generate short lists of stocks to dig into.
Tiger has been a regular buyer of Sunrun RUN, -1.05% from $12 a share last November through $15-$18.70 as recently as late June. Continued buying on strength by an outperforming money management shop is a key signal, in the system I use for my letter.
Sunrun installs solar-energy systems and batteries for homeowners who lease the equipment for 20-year stints. This makes solar power easier to deploy because it reduces consumers’ upfront costs. It also takes messy installation, maintenance and management of solar power credits and sales out of the equation. Think of it as “solar as a service.”
Many homeowners like this arrangement. Sales grew 35% and the customer base advanced 28% in the first quarter. Sunrun reiterated 2019 guidance. The company has about a quarter million customers.
“Sunrun is helping our country decarbonize,” says CEO and cofounder Lynn Jurich. “Consumer preference for clean energy means that households will increasingly get a major portion of their energy onsite.”
My take is that as concerns about carbon, global warming and climate change grow, so will consumer interest in solar power. This is a natural growth driver for Sunrun.
2. Avoid Florida
Antarctica is so big, it has its own gravitational pull. That’s changing as ice melts. Melting ice raises sea levels. It also reduces Antarctica’s gravitational pull, which also raises sea levels.
All of this is terrible for Florida, whose economic growth is based on tourism, and people continuing to move there, says Glendon. “You know what’s coming to greet those people as they move to Florida? The ocean,” he quips. This will create many challenges.
“First, all the toilets flush into the ocean and as the ocean gets heavier it starts pushing back. This is a big problem,” says Glendon. Porous limestone beneath Florida allows salt water to drift into aquifers, spoiling potable water and agriculture.
“All of these things are already well underway in Florida. This is not in the promotional materials,” he says.
Then there’s rising temperatures. Glendon thinks most of Florida will be in the danger zone — defined as spells above 96 degrees when relative humidity is above 40% — three months of the year by 2040. Disney World will be closed for long periods of time “because it won’t be safe to take children there, and it certainly won’t be safe to be in a fuzzy suit.”
Now, 2040 may seem like a long way away. But climate change could hit Florida’s economy much sooner. The reason is that real estate plays such a big role in Florida’s economy, and it’s vulnerable. While borrowers typically take out 30-year loans, insurers underwrite those loans annually. Big mismatch.
“As Florida gets wetter and saltier and hotter and more volatile, the insurance markets will dry up,” says Glendon. “We’re doing work that shows there will be no insurance in lots of Florida quite soon. This means it’s already foolish to have exposure to Florida real estate loans or municipal bonds.”
In short, Florida’s economy will fall apart not when it’s under water but when banks stop making long-term real estate loans. “When that happens, everything will go with it. When real estate even slows in Florida, the economy will go to hell. It could happen tomorrow,” says Glendon.
The key takeaway: Glendon thinks you should cleanse your portfolio of exposure to Florida real estate debt, Florida banks that have that exposure, and Florida municipal bonds. Having to shut down because of heat wouldn’t be great for Disney DIS, -1.26% shares, either.
3. Hedge your global growth bets
Glendon thinks much of the world will be subject to bouts of insufferable temperatures in coming years. So he tells investors to be wary of exposure to global growth because “so much of it is dependent on hot places.”
By 2040 “most of India will be in the danger zone most of the time,” he predicts. This will hurt India’s growth potential because so much of its gross domestic product comes from outdoor activities like agriculture and construction. Glendon thinks the Sahara will “jump over” the Mediterranean from Africa to Spain, Italy and Portugal by 2040. Again, not good for global growth.
Glendon doesn’t say specifically how to hedge bets on global growth but one approach might be to lighten up on exposure to economically sensitive stocks in favor of defensive plays, and favor cash, gold, and indices like the S&P 500 SPX, -0.62% over foreign indices with lots of exposure places like India.
The bottom line
I have issues with meteorologists forecasting the weather 20 years out, when they can’t even get next week right. It’s not their fault. Weather is just too damn complicated.
Many experts have issues with climate scientists forecasting temperatures 20 years out. Weather is just too complicated. Higher temperatures may come about. Who knows.
But it’s definitely clear that a lot of people are increasingly concerned about global warming and climate change. To me, that makes Sunrun the best play on climate-change psychology. Though Glendon seems right to suggest caution on exposure to Florida, too.
At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush is a Manhattan-based financial writer who publishes the stock newsletter Brush Up on Stocks.
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