The climate phenomenon associated with warming across the equatorial Pacific Ocean is fanning crop-damaging droughts and floods. Food commodity prices are rising, and economists are revising estimates for inflation and deficits. These impacts are now feeding into markets already stressed by high debt levels and rising borrowing costs.
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No corner of global asset markets will be fully shielded from the current El Niño cycle, says Katie Self, a portfolio manager at Pictet Asset Management.
“It’s become almost a full-on certainty that this is going to be the most extreme El Niño we’ve had in history,” and figuring out how to navigate the disruptions ahead is now “definitely” a priority, Self said in an interview.
A major concern is that El Niño will impact markets already struggling with a number of stresses, including growing debt reliance, rising interest rates and sudden investor selloffs.
“The current macro backdrop differs” compared with previous El Niño phases, “with higher rates, debt and volatility,” analysts Kamesh Korangi and Rose Choy wrote in a note this week by the Anthropocene Fixed Income Institute. The duo identified Indonesia, Brazil and Colombia as the most vulnerable sovereigns, with “spillover effects globally” a likely outcome.
Though El Niño is associated with the Pacific, investors need to understand that “the knock-on effects are fully global,” says Self, who co-manages the $5.1 billion Pictet Global Environmental Opportunities fund. “There is not a single place in the world that will not feel some kind of a knock-on effect from El Niño.”
Strategies to navigate the shocks ahead span bets on interest rates tied to an El Niño-fueled bump in inflation. The weather phenomenon’s impact on energy markets is also emerging as a key trade for the coming months.
At Pictet, Self says she and her team are looking for companies designing technologies that will help cope with the extreme weather patterns fanned by El Niño. Examples include smart-irrigation equipment providers and solutions that lengthen the roots of plants that help in drought conditions, as well as storm-water drainage and flood protection systems, she says.
Also Read: Uneven rains may keep price of spices elevated
“El Niño is a compounding factor,” Self said. The weather cycle itself isn’t new, but “it’s now happening on this much warmer baseline.” Those two forces “are going to interact, interplay and make things substantially worse.”
The physical fallout of El Niño is already dominating headlines. Southeast Asian countries have been battling extreme air pollution from forest fires, India faced its weakest monsoon in more than a decade, and across South America people now face both severe floods and a lack of rain, upending their ability to farm.
The types of resilience or adaptation needed “are very broad ranging,” Self said. “It’s a really full, global phenomenon.”