Climatologists are forecasting the return of El Niño, a climate phenomenon capable of disrupting weather patterns around the world. Beyond its human and environmental consequences, it could also affect several economic sectors, with direct implications for inflation and certain financial markets.
A Phenomenon Affecting Millions of People
El Niño is a recurring climate phenomenon linked to changes in prevailing winds and ocean currents in the Pacific Ocean. Although temporary, its effects can be considerable.
Regions of Asia, Australia and southern Africa often experience severe droughts, while the west coast of South America frequently faces heavy and sometimes destructive rainfall.
These climate disruptions can have significant consequences for local populations. Infrastructure is not designed to withstand such extreme weather events, meaning that damage to buildings, roads and transport networks can be considerable.
The agricultural sector is among the most exposed. In South and Southeast Asia, drought can severely affect rice crops. According to World Bank estimates, production can decline by 20% to 50% during the most severe episodes. Such a decline can create significant pressure on food supplies and further increase the vulnerability of the populations most at risk.*
Australia is also affected, particularly through its wheat production. In a context already marked by disruptions in global agricultural markets, notably due to tensions affecting Ukrainian and Russian producers and rising fertiliser costs, these difficulties could place additional pressure on prices.
Other agricultural commodities may also be affected. Coffee and cocoa are examples, as their crops are particularly sensitive to prolonged periods of drought. Unlike some major annual crops, damage to producing trees and shrubs can have consequences lasting several years.
In this context, El Niño risks adding further pressure to inflation. Difficulties faced by agricultural producers generally feed through into the prices paid by consumers around the world.
An Impact Extending Beyond Agriculture
The economic consequences of El Niño are not limited to the agricultural sector.
When extreme weather events cause significant destruction, the insurance and reinsurance sector naturally finds itself on the front line. Flooding, property damage and crop losses can generate considerable costs.
Current estimates point to losses potentially reaching several tens of billions of dollars, and possibly approaching USD 100 billion depending on the severity of the phenomenon. By comparison, the 1997–1998 El Niño episode generated an estimated cost of less than USD 40 billion.
The actual economic cost is, however, significantly higher than the amounts borne by the sector. In many regions of Southeast Asia and Latin America, populations remain relatively poorly covered against climate risks. Agricultural and property losses therefore often result in only limited compensation.
This low level of coverage reduces the insurance sector’s direct financial exposure, but unfortunately increases the economic and social consequences for the populations concerned.
Europe and the United States: Less Affected
Although Europe and the United States are not located at the heart of the areas directly affected by El Niño, their economies will not be completely spared.
The most visible impact should come through higher prices for certain agricultural commodities, with potential consequences for consumers’ purchasing power. This situation comes in an already complex context, in which energy, fertiliser and grain markets remain under pressure due to various conflicts and geopolitical imbalances.
Conclusion
We often discuss the role of energy prices in keeping inflation high. El Niño could reinforce this trend by adding further pressure on food prices and prolonging some existing inflationary pressures. However, its impact does not appear significant enough to warrant changing the composition of our investment portfolios. It represents an additional risk factor for the global economic environment rather than an element likely to call our current strategy into question.
Some investors will probably attempt to profit from this situation by taking positions in agricultural commodities or in major international traders such as Archer Daniels Midland (ADM) or Bunge. However, this approach does not correspond to our investment philosophy. We prefer to avoid speculative strategies that could increase volatility in agricultural prices, particularly when the consequences of such price increases can be especially severe for consumers and the most vulnerable populations.
In our view, El Niño is above all a reminder of the growing importance of climate factors in economic and financial analysis. Even when they do not directly alter investment portfolios, these phenomena can have a lasting influence on inflation, economic growth and market conditions.
Considering Sustainability in Investment Decisions
The growing importance of climate-related factors also highlights the role that sustainability considerations can play in investment decisions. Alongside financial objectives, investors may consider environmental, social and governance (ESG) factors when assessing different investment approaches.
In the area of retirement-focused solutions, options available to both companies and individuals include Pension Funds and Personal Retirement Savings Plans (PPRs), among others. One example is the PPR DECO PROteste, whose investment strategy is based on Euroconsumers’ dynamic asset allocation approach and follows recommendations provided by Euroconsumers Invest. The fund also incorporates sustainability considerations into its investment process, allowing investors to take ESG factors into account alongside their financial objectives.
For more information, please visit: https://goldensgf.pt/ppr/deco-proteste/