La Nina to El Niño: How your investments may be impacted
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El Niño and La Niña are opposite phases of a naturally occurring climate cycle that affects weather patterns around the world.
El Niño occurs when the Pacific Ocean heats up to a temperature higher than normal, while La Niña occurs when the Pacific Ocean cools down.
In Australia, El Niño is typically associated with drier conditions in the east and in southern Australia, while La Niña is associated with wetter conditions in northern and eastern Australia. The recent La Niña event has been particularly severe, with record-breaking rainfall and flooding in some parts of the country.
The end of La Niña and the potential for an El Niño event in the coming years could have a significant impact on a number of industries in Australia.
Insurance: Insurance companies are likely to benefit from the end of La Niña, as the risk of flooding and other weather-related disasters is expected to decrease. Weather related losses have been historically higher in La Niña compared to El Niño periods.
Agribusiness: Apart from Insurance, the Agribusiness subsector is the most impacted by weather conditions. For instance Graincorp’s, East Coast Australia (ECA), average production in El Niño is well below the average in La Niña periods. Should we enter a period of El Niño the data suggests production materially below that of La Niña years.
Construction and development: Rain and flooding events across eastern Australia in the past few years have been extremely challenging for a host of industrials, including construction and development companies. Sydney has had the wettest year on record and the 2022 financial year saw almost three times the average rainfall of the previous five years. Some stocks that were impacted by wetter weather included Downer, Boral, Maas and Aurizon.
Mining and utilities: A host of miners have been impacted by wet weather recently. In past El Niño’s conditions have been combated with increased energy (air-conditioner) use so an El Niño dominant period could lead to volume growth and electricity price benefits for the likes of AGL and Origin. The last El Niño period in 2019, brought with it a spike in electricity prices with the March Quarter in Victoria averaging ~AUD200/MWh.
Overall, the end of La Niña and the potential for an El Niño event in the coming years could have a mixed impact on the Australian economy. However, some industries are likely to benefit from the change in climate conditions, while others could be negatively impacted.
If you believe the weather forecasters, we are set for an El Niño dominated decade ahead. There could be some material benefactors within the insurance, industrial and mining sectors and conversely some areas of risk to be mindful of in agribusiness.
Important Information
Source: Copia Investment Partners. This article is for general information purposes only and does not take into account the specific investment objectives, financial situation or particular needs of any specific reader. As such, before acting on any information contained in this article, readers should consider the appropriateness of the information to their needs. This may involve seeking advice from a qualified financial adviser. Copia Investment Partners Ltd (AFSL 229316, ABN 22 092 872 056) (Copia) is the issuer of the Chester High Conviction Fund (ARSN 620 091 858). A current PDS is available from Copia located at Level 25, 360 Collins Street, Melbourne Vic 3000, by visiting chesteram.com.au or by calling 1800 442 129 (free call). A person should consider the PDS before deciding whether to acquire or continue to hold an interest in the Fund. Any opinions or recommendation contained in this document are subject to change without notice and Copia is under no obligation to update or keep any information contained in this document current.
