Investors typically do their best to price in as many factors and risks into their evaluation of an asset as possible. Miss anything and your return could be ruined.
According to John Tierney at Deutsche Bank, however, investors are consistently missing one huge factor when deciding where to put their money.
“All the available historical evidence strongly suggests that investors do not start to price in evolving weather patterns until things are fairly far along,” wrote Tierney, a strategist for the firm, in Deutsch’s latest Konzept magazine.
“This investor apathy is perhaps explained by the shortcomings of weather science in forecasting accurately how emerging trends will evolve over the next few weeks let alone the next few quarters. However, what predicted upcoming weather changes lack in certainty, they make up for in their impact.”
Tierney asserts that the weather can impact everything from commodity prices to the GDP of certain nations.
“For instance, companies like Apple and Toyota suffered from the disruption to global supply chains caused by La Niña induced flooding in Thailand in 2011,” he wrote.
“Corn and wheat prices doubled in the summer of 2010 as it became apparent that La Niña related drought conditions would hurt harvests.”
These very real impacts can be hindered by the unpredictability of the weather, which makes it unlikely to impact assets in the short-term, but there are consistent patterns that Tierney said investors can make a play on.
“Meanwhile, India’s annual output growth since 1980 has averaged nearly nine per cent in the years when the La Niña phenomenon was playing out versus 5.8 per cent in other years,” he noted.
The semi-predictability of large systems such as El Niño and its counterpart La Niña allows investors to strategically take advantage of their effects.
For instance, El Niño typically leads to prolonged droughts in Southeast Asia and higher than average rainfall in the Western United States. This shift can have an impact on these areas production and commodity outputs, something that investors can position themselves in anticipation of.
On the other hand, La Niña also has investing implications.
“Commodities including corn, wheat and soybeans, could be exposed to sharply higher prices from potential drought and diminished yields in the US, south Brazil and north Argentina,” wrote Tierney.
“The eastern seaboard of the US may also see a resumption of a severe hurricane season, property damage, and disrupted oil and gas production in the Gulf of Mexico.”
So while it may be hard to track on a day-to-day or even quarter-to-quarter basis, investors should be aware of the prevailing weather conditions and what the opportunities, or threats, they present to various assets.
Or as Tierney concluded:
Ignoring Oscar Wilde’s jibe that conversation about the weather is the last refuge of the unimaginative, investors do need to talk more about the subject. And more promptly than they have in the past, perhaps, even do something about it.