Navigating the hazards of a rare ‘Super El Niño’ for stock traders
As apprehensions regarding the Iran conflict diminish, equity investors are now facing an alternative challenge: climate risk, which is leading to a reevaluation of positions across various sectors, including agriculture and insurance. A high probability of a “Super El Niño” heading into 2027 may drive up temperatures in some parts of the world, sending power demand surging, hurting crop yields and reigniting inflationary pressures. That could complicate the outlook for central banks, posing a risk to global equities trading near record highs. “El Niño arrives at an especially sensitive moment,” stated Ole Hansen. The global economy continues to navigate the inflationary repercussions stemming from the Iran conflict, with supply chains remaining susceptible after prolonged periods of disruption. El Niño represents a climatic phenomenon characterised by prolonged increases in the surface temperatures of the Pacific Ocean. This can lead to patterns of high and low pressure that result in excessive rains in certain regions while causing drought in others. According to the US Climate Prediction Center, there exists a 63% probability that it may develop into a significantly intense phenomenon, commonly referred to as a “Super El Niño,” as we approach 2027. The impact is already being observed across various regions, evidenced by a delayed onset of the Indian monsoon and a temporary suspension of Peru’s fishing season. The last occurrence of a robust El Niño, during 2015 and 2016, resulted in over $7.8 trillion in lost productivity, according to a study.
Here is an examination of several sectors that are under scrutiny by investors as the risks associated with El Niño intensify.
Agriculture and farming
Crop producers are expected to face significant challenges due to a more intense El Niño, although the effects will differ by region and type of commodity. In Indonesia, the leading producer of palm oil globally, increased temperatures and reduced precipitation generally lead to diminished yields, complicating the forecast for plantation revenues and exerting additional pressure on local equities that are already burdened by apprehensions regarding Indonesia’s market classification and the shift towards centralising essential commodity shipments. Global production of maize and wheat is likely to face adverse effects due to the weather phenomenon, as indicated by UBS Group AG, along with sugar output in Asia. India, recognised as the second-largest sugar producer globally, has imposed a ban on exports until the conclusion of September, resulting in a decline in the shares of millers including Shree Renuka Sugars Ltd. and Bajaj Hindusthan Sugar Ltd. Meanwhile, enhanced precipitation in Argentina and elevated sugar prices may provide advantages to certain Latin American companies, including São Martinho and Adecoagro SA, as noted by Morgan Stanley. UBS analysts noted that El Niño has provided global support for soybean production, especially for key producers in the United States and southern Brazil. Investors may also identify opportunities in firms associated with irrigation and water management as agricultural producers navigate increasingly arid conditions. Indian firms such as VA Tech Wabag Ltd., Jain Irrigation Systems Ltd., Astral Ltd., and Shakti Pumps India Ltd. are likely to experience advantages. Berenberg chemicals analyst Sebastian Bray emphasised that fish oil producers could emerge as a potential beneficiary. With Peruvian fish oil prices reaching unprecedented levels in the past two months, Bray observed that this trend benefits producers of Omega-3-rich algal oils, including Europe’s Corbion NV.
Fertilisers
Fertiliser firms may emerge as significant beneficiaries of El Niño, particularly if the weather phenomenon constrains global crop supplies, thereby bolstering demand for essential nutrients such as nitrogen, phosphorus, and potassium. “All else equal on idiosyncratic and other issues, to play a Super El Niño event, we would seek to maximise exposure to short-cycle, price-responsive nitrogen names,” analyst Ben Isaacson noted in a communication. Nitrogen fertiliser stocks such as CF Industries Holdings Inc. and Nutrien Ltd. are poised to gain advantages. According to analyst Andrew Wong, the impact of dryness attributed to El Niño has begun to dampen demand for potash. In a deteriorating economic landscape, companies with significant exposure to potash, such as The Mosaic Co., may find themselves at a disadvantage. Suppliers of agricultural inputs may experience an increase in demand as farmers look for strategies to mitigate losses associated with weather fluctuations. That may support shares of crop protection companies such as US-based Corteva Inc. “Lower yields could compel farmers to invest in technology (seed) and possibly even crop protection chemicals to sustain crop income,” analyst Arun Viswanathan noted.
Energy
Higher temperatures may lead to reduced heating demand in North America, which could weigh on natural gas stocks such as APA Corp., EQT Corp., Range Resources Corp. and EOG Resources Inc. “All signs point to a rare El Niño event emerging, creating cooler summer and warmer winter temperatures in the US and thus a bearish natural gas demand environment,” analyst Gabe Daoud noted. In Asia, elevated temperatures will lead to increased air-conditioning usage, thereby exerting pressure on power grids at a time when energy prices are already high. Chinese power firms, such as Guangdong Electric Power Development Co. and Jinneng Holding Shanxi Electric Power Co., have demonstrated significant growth this year, with the latter experiencing an increase of 64%. In India, firms such as JSW Energy Ltd. and Adani Energy Solutions Ltd. are positioned to capitalise on the anticipated surge in energy demand, as noted by analysts.
Mining
Heavier rainfall in parts of South America can disrupt transportation networks and potentially affect mining operations, including copper production in Chile and Peru, according to Hansen. That would have ripple effects for metals and manufacturing stocks amid disruptions in supply chains, input costs, and operating conditions that these sectors depend on. Copper miners operating in Chile and Peru that may attract attention include Freeport-McMoRan Inc. and Anglo American Plc. Meanwhile, power constraints can adversely affect aluminium smelting operations that rely on hydropower in regions like China. In Indonesia, UBS has projected that economic growth could decline by 1% due to the impacts of El Niño after four quarters, as drought conditions adversely affect the agriculture and mining sectors. That may place PT Amman Mineral Internasional and PT Merdeka Copper Gold in the sights of investors.
Insurance, Financials
Insurance and financial services play a crucial role in the economy, providing risk management solutions and facilitating capital flow. The interplay between these sectors is essential for stability and growth. “This potentially helps insurers in hurricane prone regions like Florida,” said analyst Matthew Palazola. “That market is dominated by private mutuals and smaller regionals, though Allstate is a large public carrier in the state.” Piper Sandler & Co.’s Paul Newsome reiterated the advantages for insurance firms, stating, “most US based insurers will benefit from lower claim expense because US hurricanes are a major source of claim costs.” Companies such as Allstate Corp., Progressive Corp., and Travellers are expected to gain advantages, he stated. The outlook for the broader financial sector appears to be less straightforward, as banks with exposure to weather-sensitive industries are likely to experience a downturn. Analysts at JPMorgan Chase & Co., including Yuri Fernandes, anticipate adverse effects for Peruvian lenders due to the weather pattern’s potential to disrupt loans associated with fishing and agricultural activities. The bank has downgraded shares of Credicorp Ltd. and Intercorp Financial Services due to the challenges posed by El Niño and the political-transition uncertainties associated with Peru’s election. Micro lenders in India, including Bandhan Bank Ltd., may face challenges as a weaker monsoon could lead to diminished crop output and reduced farm earnings.
