A Haven in Mega-Cap Tech 

The idea: Stocks have struggled since the July peak. While large tech companies have not been immune, they have generally held up better than the broader market. This is likely to continue as investors put a premium on higher quality, cash-flow rich companies.

The strategy: For investors old enough to remember the late 1990s, the idea of tech as a haven seems odd. What has changed? The simple answer is that these companies are more mature, less volatile, and more profitable.

Unlike the 1990s, many of the mega-cap tech companies trade close to a beta of one. In other words, they are no more volatile than the broader market. In terms of pure absolute volatility, with no relative comparison, they have similar volatility to the average stock. This was definitely not the case in the late ‘90s, when tech stocks were an even bigger portion of the market, but their beta was much higher. This is important as investors are in no mood to take excess risk and are demonstrating a clear aversion to volatility.

The other distinguishing characteristic of these companies: Not only are they highly profitable, but they are remarkably consistent. With the economy set to slow in the coming quarters, investors are rewarding companies that can generate steady earnings regardless of the macro environment.

The big picture: Higher rates, tighter financial conditions and the prospect for an economic slowdown have left investors with a clear preference for higher quality companies. Our view is that mega-cap tech names offer these characteristics. They are highly profitable and, perhaps somewhat surprisingly, reliable. 

Spare Parts Needed

The idea: Excitement about the massive upside in a new class of drugs designed for Type 2 diabetes, and potentially for obesity management, has sent stock prices of pharmaceutical companies producing these drugs surging. In an opposite reaction, investors have sold stocks in industries perceived as losers — such as medical devices, food and beverage, restaurants, and dialysis centers, whose total market size may be threatened as people consume fewer calories. Several well-managed companies in the medical technology industry, particularly in orthopedic devices, look like attractive long-term buys.

The strategy: It’s understandable why investors are nervous. Weight loss is known to alleviate stress on weight-bearing joints like knees and hips, and a decline in obesity rates could translate to fewer orthopedic complications. However, factors like genetics, lifestyle, trauma, and the natural aging process still play significant roles in generating demand for orthopedic surgeries. Even if many more individuals adopt healthier lifestyles and exercise regimes, they can still succumb to conditions such as osteoarthritis, degenerative discs, and rotator cuff injuries.

The big picture: As people live longer, they will need more spare parts. A study by the American Academy of Orthopaedic Surgeons highlighted an intriguing shift: the average age of patients undergoing hip and knee replacements is decreasing, in part due to innovations in medical devices improving outcomes for patients.

Stay Defensive 

The idea: Despite optimism about US rates being on hold and inflation coming down, there are more signs of a downturn emerging. This keeps us favoring defensive assets. 

The strategy: With the Federal Reserve on hold, two-year US Treasuries yielding close to 5% provide good returns. In the equity market, alternative energy stocks have been out of favor, but the energy transition is not going away, and lower bond yields should help boost alternative energy. As well, quality industrials are relatively cheap and should gain as governments and corporates are set to spend more on things like defense, the rebuilding of Ukraine, and all the physical infrastructure needed to facilitate the move to a net zero world.

The big picture: Four things on the economic front have caught our attention: Data showing the US labor market easing, rising US defaults and bankruptcies, weaker US housing and lower equity prices. Together, these point to a gentle easing of economic activity heading into 2024.

Although the credit market seems to be discounting a soft landing, bankruptcies are trending higher in the US and around the world, and US defaults rates are also rising. Housing was a source of optimism in the first half, but recent pending home sales, new home starts, and mortgage applications data all suggest rising mortgage rates are beginning to negatively impact housing again.

Go Nuclear 

The idea: Assuming an individual with $10,000 to invest already has a traditional stock and bond portfolio, we’d suggest looking for ways to increase diversification and potentially add returns. So far in this new decade, a few asset classes or sectors have demonstrated positive returns and low-to-moderate correlation with a traditional portfolio of stocks and bonds. The most interesting is perhaps uranium mining to facilitate nuclear energy. 

The strategy: Nuclear energy might be a solution to the seemingly intractable global problem around energy usage. Fossil fuels are clearly under pressure socially and politically. However, renewables are, in our opinion, simply too fragile, too intermittent, and too expensive to be a realistic solution in the foreseeable future. Modern nuclear technologies are the forgotten variable that, in theory, could put a major dent in fossil-fuel use without a meaningful carbon footprint.

The big picture: Nuclear/uranium-related stocks and ETFs struggled significantly from 2007 to 2019 but have enjoyed a renaissance so far in the 2020s. They are not “low risk” but have shown the ability to move independently from stocks and bonds, and the ability to produce significant returns. Outside of the nuclear energy sector, the search for diversifying opportunities yields the usual suspects that seem to always be on the list: macro, managed futures, and the occasional long/short equity fund.