Rising average temperatures are the biggest long-term threat to the world. Fluctuations in temperatures have a greater impact in the short term. The most significant of these are triggered by shifting Pacific currents.
That requires shifts in asset allocation too. The current La Niña period is fading. The advent of an El Niño pattern heralds higher southern temperatures, droughts and gyrations in agricultural commodity prices
El Niño means “the boy” in Spanish. Named after the Christ child by South American fishermen, the weather system means warmer, wetter winters on the US west coast and gentler hurricane seasons.
That is good news for drought-ridden California. For the rest of the world El Niño is usually big trouble. Its effects are worst in tropical regions, causing economic damage that can last for years.
A recent study looked at the economic impact of El Niño events in 1982-83 and 1997-98. Dartmouth College professors found that several trillions of dollars of lost output globally resulted from each and growth was lower for up to five years following. Little is known about how El Niño cycles may interact with man-made climate change.
The strong El Niño forecast by some weather prophets would be bad for emerging markets on the equator. Prices for agricultural commodities are a particular flashpoint. Orange juice prices are already near record highs in part due to cold weather and hurricanes. Sugar prices are soaring due to elevated rainfall levels in India.
Vegetable oil prices are most affected by El Niños, a 2016 study from Sydney university found. Data from Refinitiv shows commodity prices peaking a year after El Niño. Palm oil prices are most highly correlated. Blame drought conditions in Indonesia and Malaysia.
Shares in palm oil producers like Golden Agri have tracked prices for the commodity lower. A six times forward earnings valuation — a multi-decade low — is one way for equity investors to ride trends from El Niño higher.
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