A stock trader’s guide to navigating rare ‘Super El Niño’

As concerns over the Iran war recede, stock investors are confronting another threat: climate risk, which is prompting a reassessment of bets across sectors from agriculture to 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,” said Ole Hansen, head of commodity strategy at Saxo Bank. “The global economy is still adjusting to the inflationary consequences of the Iran conflict, while supply chains remain vulnerable following months of disruption.”

El Niño is a weather pattern that occurs with sustained warming of Pacific Ocean surface temperatures. This can lead to patterns of high and low pressure that translate into excessive rains in some parts of the world and drought in others. There’s a 63% chance it could evolve into a very strong event — what’s informally known as a “Super El Niño” — heading into 2027, according to the US Climate Prediction Center.

The impact is already being felt across various regions, from a delayed start to the Indian monsoon to a temporary halt to Peru’s fishing season. The last time the world faced such a strong El Niño, in 2015 and 2016, the result was more than $7.8 trillion in lost productivity, based on a Dartmouth College study.Here’s a look at some of the sectors closely watched by investors as El Niño risks build.

Agriculture And Aquaculture

Crop producers are likely to bear the brunt of a stronger El Niño, though the impact will vary across regions and commodities. In Indonesia, the world’s largest palm oil producer, hotter and drier weather typically reduces yields, clouding the outlook for plantation earnings and adding pressure to local stocks already weighed down by concerns over Indonesia’s market-classification status and move to centralise key commodity shipments.Global production of corn and wheat may also be negatively affected by the weather phenomenon, according to UBS Group AG, as well as sugar output in Asia. India, the world’s second-largest sugar producer, has banned exports until the end of September, dragging shares of millers such as Shree Renuka Sugars Ltd. and Bajaj Hindusthan Sugar Ltd.

Meanwhile, improved rainfall in Argentina and higher sugar prices may benefit some Latin American firms, including São Martinho and Adecoagro SA, according to Morgan Stanley. El Niño has also been globally supportive for soybean output, particularly for major producers in the US and the south of Brazil, UBS analysts said.

Investors may also find opportunities in companies tied to irrigation and water management as farmers cope with drier conditions. Indian firms, including VA Tech Wabag Ltd., Jain Irrigation Systems Ltd., Astral Ltd. and Shakti Pumps India Ltd. may benefit.

Berenberg chemicals analyst Sebastian Bray highlighted fish oil producers as a potential beneficiary. With Peruvian fish oil prices hitting record highs over the last two months, Bray noted this trend favours producers of Omega-3-rich algal oils, such as Europe’s Corbion NV.

Fertilisers

Fertiliser firms could be among the biggest beneficiaries of El Niño if the weather pattern tightens global crop supplies, supporting demand for key nutrients including 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,” Scotia Capital Inc. analyst Ben Isaacson wrote in a note.

Nitrogen fertiliser stocks like CF Industries Holdings Inc. and Nutrien Ltd. are set to benefit.

Still, dryness from El Niño has started to slow demand for potash, according to RBC Capital Markets analyst Andrew Wong. In a worsening environment, potash-heavy stocks like The Mosaic Co. could be disadvantaged.

Suppliers of agricultural inputs could also see demand rise as farmers seek ways to offset weather-related losses. That may support shares of crop protection players such as US-based Corteva Inc.

“Lower yields could force farmers to pay up for technology (seed) and potentially even crop protection chemicals to maintain crop income,” RBC Capital Markets LLC analyst Arun Viswanathan wrote in a note.

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,” Truist Securities Inc. analyst Gabe Daoud wrote in a note.In Asia, higher-than-normal temperatures will boost air-conditioning use and strain power grids when energy prices are already elevated. Chinese power firms, including Guangdong Electric Power Development Co. and Jinneng Holding Shanxi Electric Power Co., have made strong gains this year, with the latter rising 64%. In India, companies including JSW Energy Ltd. and Adani Energy Solutions Ltd. are among firms that may benefit from the energy demand surge, according to Jefferies Financial Group Inc. 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, Saxo’s Hansen said. That would have knock-on effects for metals and manufacturing stocks amid disruption in supply chains, input costs and operating conditions these sectors rely on.

Copper miners with operations in Chile and Peru that may come in focus include Freeport-McMoRan Inc. and Anglo American Plc.

Meanwhile, power constraints can hit hydropower-dependent aluminium smelting in regions such as China.

In Indonesia, UBS estimated that economic growth may fall 1% as a result of El Niño after four quarters as drought damages agriculture and mining. That may put PT Amman Mineral Internasional and PT Merdeka Copper Gold on investors’ radar.

Insurance, Financials

The hurricane-weakening effects of El Niño may be positive for property and casualty insurers in the Northern Hemisphere.

“This potentially helps insurers in hurricane prone regions like Florida,” said Bloomberg Intelligence 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 benefits for insurance firms, saying “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 will likely benefit, he said.

The outlook for the broader financial sector may be less straightforward, with banks exposed to weather-sensitive industries likely to take a hit.

JPMorgan Chase & Co. analysts, including Yuri Fernandes, see negative impacts for Peruvian lenders, given the weather pattern’s ability to disrupt loans tied to fishing and agricultural activity. The bank downgraded shares of Credicorp Ltd. and Intercorp Financial Services on El Niño headwinds and political-transition noise tied to Peru’s election.

Micro lenders in India, including Bandhan Bank Ltd., may also be affected as a weaker monsoon may reduce crop output and farm earnings.