El Niño stock plays: Winners and losers across sectors and regions

If a strong El Niño event materializes as forecast, certain sectors and regions are poised to reap significant benefits while others are likely to face challenges.

Agricultural-input suppliers, fertilizer producers, selected commodity exporters, and certain power companies stand to gain the most from a robust El Niño. This is due to the increased demand for seeds, fertilizers, crop chemicals, and farm equipment as higher crop-risk premiums drive pricing power. Notable companies in this space include CF Industries (CF), Nutrien (NTR), Corteva (CTVA), and Deere (DE). However, the extent of their success depends on farmer affordability and fertilizer prices.

Commodity exporters may also benefit from higher crop prices and strengthened terms of trade resulting from the El Niño effect. The impact, however, varies by region. Power utilities in affected areas could see increased electricity demand during heatwaves, while hydroelectric utilities may face risks due to potential droughts reducing water availability.

On the downside, food processors and beverage companies are likely to suffer margin pressure as the cost of essential inputs like cocoa, sugar, coffee, palm oil, rice, and other raw materials rises faster than retail prices. Similarly, protein producers may be adversely affected by increased feed costs.

Insurance and reinsurers face heightened claims due to the potential for floods, droughts, wildfires, and infrastructure damage, which can strain their underwriting margins. Meanwhile, emerging-market banks could experience indirect repercussions as agricultural borrowers may encounter weaker cash flow, and heightened food inflation could lead central banks to maintain restrictive interest rates.

Certain regions appear particularly vulnerable to the effects of El Niño. Colombia, Peru, Brazil, and several African markets are among those at heightened risk. It's important to note that the benefits and losses are not evenly distributed across the agriculture sector. The most dependable equity winners are those involved in fertilizer, seeds, and agricultural chemicals.

Conversely, the most exposed losers are food buyers, insurers, and highly leveraged businesses in emerging markets. Ultimately, the success of this trade hinges on factors such as crop geography, inventory levels, and pricing power.