Why El Niño Doesn’t Necessitate Portfolio Shifts

Amidst the many alleged risks we have seen in financial headlines this year, a new storm is supposedly gathering: the weather. From Europe’s severe heatwave to a prospective super El Niño (a climate pattern in the Pacific Ocean that can affect weather globally), some experts we follow think extreme weather may dampen the global economy and markets by swamping growth and reigniting inflation (broadly rising prices economywide). Whilst we don’t dismiss the possible disruptions, we don’t think investors benefit from overstating extreme weather’s macroeconomic implications—they look to us like a false fear.

As Europe baked under the sun in June, financial coverage we follow posited more challenges lie ahead. According to the US National Ocean and Atmospheric Administration, an El Niño weather pattern formed in mid-June and has a 63% probability of developing into a very strong (or super) El Niño by yearend.^[i] This weather pattern’s implications vary by geography. In the US, for example, El Niño typically means wetter, warmer winters for the country’s West Coast and a milder Atlantic hurricane season.^[ii] Elsewhere, El Niño can cause extreme heat across the tropics and subtropics starting in September—which may increase drought risk in Australia, Southeast Asia, southern Africa and Central America.^[iii]

The prospect of El Niño has unsurprisingly spurred myriad negative economic outlooks in financial publications we follow, many of which cite a 2023 analysis arguing past super El Niño events (1982 – 1983 and 1997 – 1998, respectively) erased trillions of US dollars of global income.^[iv] Other commentators posit extreme weather changes could roil agriculture (e.g., decimating sugar production in India and Thailand and Australian wheat output).^[v] That could supposedly lead to much higher global food prices and reheat global inflation.

Misperceptions aside—we don’t think select categories can drive prices across the economy higher because true inflation is a monetary phenomenon whereby excess money supply growth gives companies pricing power—extreme weather events aren’t automatically bearish. Consult the history of recent natural disasters. Across the Channel, the EU suffered an average loss of €45 billion (£38.6 billion) annually from 2020 – 2024 due to weather and climate-related events, but these didn’t drive economic downturns.^[vi] According to our research, high-profile soft patches (e.g., Germany’s shallow recession) in 2021 and 2022 reflected an energy crunch (largely due to the Russia-Ukraine war) and weak external demand, not anything weather-related.^[vii] In America, Hurricane Katrina caused over $160 billion (£121 billion) in 2005 ($270 billion, or £203 billion, in today’s dollars) in damage—the costliest hurricane in US history record, not to mention the tragedy of lost lives and irreparable change.^[viii] Relative to the US economy, though, Katrina’s cost was approximately 1% of US gross domestic product (GDP, a government-produced measure of economic output) and didn’t cause an economic or prolonged market downturn.^[ix]

The same holds for past super El Niños. Take the effects on the US, which we cite here for weather, economic and market data availability. America’s early-1980s recession (prolonged economic downturn) ended before the 1982 – 1983 El Niño reached its zenith.^[x] Back then, the US Federal Reserve tightened monetary policy—which caused money supply to slow severely and contract in late 1981—in response to the elevated inflation of the late 1970s and early 1980s.^[xi] Speaking of inflation, US CPI (consumer price index, a government measure of goods and services prices across the broad economy) had been slowing since its April 1980 peak of 14.6% y/y, and throughout that super El Niño, price growth decelerated markedly, from 8.3% in January 1982 to 3.8% in December 1983.^[xii] As for markets, US stocks were in a bear market (prolonged, fundamentally driven broad equity market decline of -20% or worse) from November 1980 – August 1982—ending before el peak of El Niño.^[xiii] As for the 1997 – 1998 super El Niño, the US was in a decade-long expansion that featured stable inflation and the second-longest bull market (a long period of generally rising equity prices) in modern history—that doesn’t appear to be bearish to us.^[xiv]

This doesn’t mean El Niño caused no economic damage anywhere. The 1982 – 1983 El Niño led to heavy rains and drought and landslides in Peru, which roiled fishing, agricultural and petroleum production and contributed to a -11% decline in GDP.^[xv] That said, Peru was also dealing with a private sector credit squeeze, difficulty accessing external capital and the Shining Path insurgency’s guerilla attacks—El Niño exacerbated the country’s problems but wasn’t the root cause.^[xvi]

We don’t dismiss the human suffering and costs due to severe weather’s disruptions. For example, El Niño can increase the likelihood of drought or flooding—a sensitive point for agricultural giant Brazil, which has experienced water shortages in recent years.^[xvii] Recent heat waves have spurred intense chatter over restrictions on—or lack of—air conditioning in both the UK and Europe. (Maybe these latest heatwaves will spur reforms and an air-con investment boom!)

From a humanitarian perspective, we are sympathetic to all those afflicted, from the farmers facing harvest uncertainty to the elderly seeking relief from the heat. But from an investment perspective, our focus is on the weather’s probable effect on stock market demand and corporate profits for the foreseeable future. For one, the hardest-hit industries (e.g., agriculture) make up a small segment of most major economies—unlikely to derail broader global growth.^[xviii] El Niño also isn’t sneaking up on anyone, based on our review of financial coverage. Governments have started ramping up their disaster plans to mitigate disruptions to food supplies. Farmers have adjusted usual planting schedules to get ahead of a potential dry spell—as one Indonesian rice farmer put it, “Farming is about adapting and finding solutions—hopefully it works out.”^[xix]

Whilst El Niño raises the probability of extreme weather events, it doesn’t ensure them. For example, El Niño led to higher-than-average rainfall in northern California in 1983 and 1998—but a relatively dry year in 1992.^[xx] That most observers are pencilling in negative outcome suggests scepticism is lingering in many corners of the market, even to this day.