El Nino, the infamous and recurring weather phenomenon characterized by an abnormal warming of the Pacific Ocean, has long been a topic of interest for meteorologists and scientists. While its impacts on weather patterns and natural disasters are well-documented, El Nino's reach extends beyond meteorology, leaving its mark on the financial world as well.
There is a 60% chance for a transition from ENSO-neutral to El Nino during May-July 2023, and this will rise to about 70% in June-August and 80% between July and September, according to the update, which is based on input from World Meteorological Organization.
El Nino and Stock Market Volatility
El Nino has a multifaceted relationship with the global stock markets. Often, the sectors most affected are energy, agriculture, insurance and commodities. These industries are intrinsically linked to weather conditions, making them susceptible to the changes that El Nino brings.
A study examining data from the El Nino events between 1980 and 2021 reveals a pattern of volatility in the stock markets during these periods. When an El Nino event is declared, sectors like agriculture and energy typically experience increased volatility due to the unpredictable weather patterns that impact crop production and energy consumption.
For instance, the El Nino event in 2015 was one of the strongest on record, leading to significant weather disruptions. These disruptions contributed to a slump in the global stock markets in late 2015 and early 2016, with the MSCI World Index dropping approximately 12% between August 2015 and February 2016.
Against this backdrop, below, we highlight a few sector ETFs that draw attention at the current level.
Impact on Energy Sector
El Nino conditions that have started to rule in North American weather patterns are lowering the risk of above-normal temperatures, which would tend to
cool down power demand and prices in the region. This may weigh on cooling demand and prices of natural gas. United States Natural Gas ETF ( UNG Quick Quote UNG - Free Report) should be watched closely. Impact on Agriculture Sector
El Nino's impact on agricultural output is often detrimental, primarily due to altered rainfall patterns causing floods and droughts. The 1982-83 and 1997-98 El Nino events, two of the most intense episodes of the past century, led to widespread crop failures. Wheat, corn and soybeans — three of the world's staple crops — are particularly vulnerable.
For example, during the 1982-83 El Nino, Brazil, a major soybean producer, experienced severe drought conditions. This resulted in a significant reduction in soybean yield, with harvests falling as much as 30%. Similarly, corn production in the United States decreased 20% during the 1997-98 El Nino.
Erratic weather is likely to disrupt crop yields, leading to supply shortages and higher prices, which is a boon for agricultural commodity investors. Betting on
Teucrium Wheat ETF ( WEAT Quick Quote WEAT - Free Report) , Teucrium Corn ETF ( CORN Quick Quote CORN - Free Report) and Teucrium Soybean ETF (SOYB), iPath Dow Jones-UBS Cocoa Subindex Total Return ETN (NIB) and Teucrium Sugar Fund (CANE) could be gainful. Food & Agri Business Companies at Risk?
This agricultural volatility extends to the stock market, impacting food production companies and agricultural equipment manufacturers. Hence, this could be a downbeat scenario for the likes of
AdvisorShares Restaurant ETF ( EATZ Quick Quote EATZ - Free Report) and VanEck Agribusiness ETF ( MOO Quick Quote MOO - Free Report) . Are Insurance Stocks Too in Jeopardy?
Moreover, such adverse weather conditions often lead to higher insurance claims, impacting the profitability of insurance companies and shaking the respective stocks. Such possibilities put
SPDR S&P Insurance ETF ( KIE Quick Quote KIE - Free Report) in focus. Mining & Construction Companies at Risk Too?
Additionally, industries reliant on raw materials, such as mining and construction, may face challenges as El Nino-induced weather events disrupt production and transport. This can result in increased costs and decreased profitability of those companies. Hence,
Materials Select Sector SPDR ETF ( XLB Quick Quote XLB - Free Report) and SPDR S&P Metals & Mining ETF ( XME Quick Quote XME - Free Report) should be under watch.