A Global Stock Trader’s Guide to More Extreme Weather Events

(Bloomberg) -- From Australian mining behemoths to Florida theme parks, investors are betting on whether companies will benefit or take a hit as extreme weather becomes the norm around the world due to climate change. 

Hard-to-predict weather has always been one of the risks that companies face, but the rising frequency of events such as flash floods and heat waves adds to uncertainties for businesses and global money managers. It’s “virtually certain” that hot extremes will increase globally, and they are likely to last longer, a United Nations climate-change panel said in its latest report.

Heat waves around the world highlight changes in weather patterns, with Spain and Portugal recording their hottest-ever April, India marking the highest temperatures in February since 1901, and Europe starting 2023 with the warmest New Year’s Day on record.

Extreme weather has hurt shares of insurers such as Suncorp Group Ltd. as losses from natural disasters mount, and travel-related companies including cruise operator Carnival Corp. that canceled departures due to a major hurricane last year. Agriculture firms such as coffee maker CCL Products India Ltd. have benefited as abnormal weather reduced output, which led to higher prices and more revenue.

“Climate-related risk is getting factored in global investors’ decision making significantly as extreme weather can play havoc and turn all plans upside down,” said Akshay Panth, the chief investment officer of climate and social impact fund Neev. 

Here are some of the biggest winners and losers from extreme weather events: 

Energy Stocks 

Heat waves around the world will likely lead to a fresh test of electricity grids just months after hot weather and drought throttled hydropower and triggered widespread power shortages. Energy companies have been in focus in the Philippines as some areas become dangerously hot. In China, Shanghai is sweltering, and Guangdong to Hainan face peak power demand.

China will need “quicker and more significant investment” to build a resilient power infrastructure that won’t use more coal, Morgan Stanley analysts led by Tim Chan wrote in a note. “Investing in adaptation themes may help investors hedge against more-frequent and severe weather events.”

Droughts may hit hydro and affect nuclear power generators as well, by reducing water needed to generate energy and cool reactors, as happened to the to-be government-owned Electricite de France SA last year. Extreme weather may drive more demand for clean energy companies such as Scatec ASA in Europe, First Solar Inc. in the US and Adani Green Energy Ltd. in Asia. 

Insurance

The insurance industry is struggling to adapt to a new normal in which losses fueled by climate change are now regularly exceeding $100 billion a year. Shares of Suncorp Goup, Insurance Australia Group Ltd. and QBE Insurance Group Ltd. were all hit by extreme rains that fell over New Zealand during Cyclone Gabrielle.

Reinsurers such as Reinsurance Group of America are leveraged to weather, especially if they deal in the property sector. General Insurance Corp., India’s biggest reinsurer, has been warning about “catastrophic losses” faced by the industry that are likely to result in further price increases.  

Home insurers including those with consumer bases in Florida, Texas and other US states along the Gulf Coast are particularly vulnerable if hit by a devastating storm, Piper Sandler & Co. analyst J. Paul Newsome said.

Still, “insurers might be hit in the short term, depending on the severity of the event, but might benefit longer term from higher premiums following an event,” said Chamath De Silva, a senior portfolio manager at BetaShares in Sydney. 

Travel and Tourism 

Companies that count on summer travel may be hurt if the weather is unexpectedly hot, especially if fuel prices are elevated. That would damage the bottom lines of airlines and cruise companies, and consumers will be less likely to jump in the car for road trips.

Summer storms and inclement weather may force airlines and cruises to delay and cancel services. In March, Southwest Airlines Co. cited extreme weather as a growing concern following the December debacle that left more than 2 million passengers stranded and added $380 million in losses to the quarter. 

When Hurricane Ian hit last year, Carnival and other cruise operators had to cancel departures, prompting plunges in their shares. It also depressed tourism in Florida, pulling down stocks such as Walt Disney Co., Comcast Corp.’s Universal Orlando Resort and SeaWorld Entertainment Inc.

Miners/Commodities/Natural Gas

In resource-rich Australia, Newcrest Mining Ltd.’s Telfer gold mine was closed earlier this year and the company’s shares fell from more than a two-year high after the biggest cyclone to hit the Western Australian coast in almost a decade made landfall. That followed heavy rain and flooding that hampered coal production for miners such as Whitehaven Ltd. and BHP Group late last year. 

Having more frequent and stronger storms in the Gulf of Mexico may push up energy prices in that region, a boon for producers of natural gas, diesel and propane. Hotter and dryer weather in Canada that’s caused wildfires and threatened production is also supporting energy prices, said Bob Yawger, managing director of energy futures at Mizuho Financial Group Inc. in New York.

Agriculture

JPMorgan Chase & Co. strategists see the risk of El Niño returning to Southeast Asia later in 2023, weighing on agriculture output, farm income, industrial production and investor sentiment, analysts led by Rajiv Batra wrote in a note. 

“During the past episodes of abnormal temperatures, impacts were most severe on the agriculture sector of Thailand, Indonesia and Vietnam, while the Philippines saw a net positive outcome from lower frequencies of cyclones,” Batra wrote. 

India’s hottest February in more than a century, following a spike in cattle deaths caused by a viral skin disease, fueled a rare drop in dairy production in the world’s largest milk-producing nation. With more high temperatures forecast as summer demand peaks, shares of dairy firms such as Parag Milk Foods Ltd. and Heritage Foods Ltd. are soaring. 

Coffee prices are boiling over as extreme weather thrashes bean growers in Vietnam and Indonesia. Same logic goes for sugar, with erratic weather having a history of affecting production in top cane growers India and Brazil. 

Both countries are looking to divert some output for ethanol to limit their energy import costs. The scarcity of supply led to a surge in prices earlier this year as nations engaged in export restrictions. Key beneficiaries were Dwarikesh Sugar Industries Ltd. and Shree Renuka Sugars Ltd. 

“From a commodity perspective, some of the risks we’re looking at are fairly acute,” said Walter Kunisch, senior commodities market strategist at Hilltop Securities Inc. An El Niño weather pattern may bring above-average corn and soybean yields, especially in the eastern corn belt, weighing on pricing. That might hurt margins for crushers like Archer-Daniels-Midland Co. or Bunge Ltd., he said.   

Chemicals/Industrials Transportation

“Increased energy prices and the inability to use rivers for commercial transportation will inevitably negatively affect industrials and chemicals,” said Evgenia Molotova, senior investment manager at Pictet Asset Management.. Last year, low water levels on the Rhine, the key commercial waterway in Germany and the Netherlands, forced companies to cut their usual cargo transportation. That led to severe delays in deliveries and higher transport costs. 

Some 80% of all waterborne freight within Germany is carried on the Rhine. Disrupted shipping routes due to exceeding levels of water, which prevent travel under some bridges, or low levels that risk grounding of vessels, could hurt companies like BASF SE, Covestro AG, Lanxess AG and Siemens AG, Molotova said.

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