El Nino is a naturally occurring climate pattern characterized by the unusual warming warning warming of surface waters in the central and eastern tropical Pacific Ocean. As an active El Nino, advisory remains in place across the world. Morgan Stanley has put out a report on how investors can navigate the climate pattern.
Now the firm sees opportunities in commodities like sugar and cocoa as they face severe price increases due to the droughts or unusual heavy rains in. Meanwhile, copper could see a further rally from all time highs as heavy rainfall and flooding in Chile and Peru threaten mining infrastructure and on the bears side.
Nations heavily dependent on agricultural exports, water dependent power grids or import heavy food baskets face fiscal pressure. Now this could all lead to an emerging market sovereign debt vulnerability. So joining me now to break this down is Jeff Gitterman, managing managing director for Gitterman Assets Management.
Jeff, thank you so much for joining us today.
My pleasure.
So, Jeff, when it comes to this, Morgan Stanley's how investors can weather El Nino. What are the opportunities in commodities and agriculture?
You know, if I could just back up a half a second and say, just for the people that are listening for the first time about what an El Nino is, I think people mistake it for a climate change conversation. And an El Nino is a naturally occurring pattern. That means warming water in the Pacific Ocean near the equator, which disrupts weather patterns around the globe.
This looks to be the worst El Nino that we've had in modern history. Based on all 14 current weather models that are being looked at and what that will lead to. To answer your question is disruptions in agriculture. People think mix things about weather patterns messing up. But one of the big things that you can look at is like the Panama Canal needs fresh water.
It doesn't run on ocean water. It fills up from lakes and gravity, water pouring down into fresh water. So droughts in the south can dramatically impact the Panama Canals transportation routes. We already have pressure on global crop yields, because fertilizer distribution coming out of Mideast has been stopped because of the war going on, with Iran and the strait not being able to ship fertilizers.
So we already were looking at reduced crop yields. El Nino will drive increased, reduced crop yields, especially in the south. Places like Africa, Southeast Asia, just like you were talking about. So we can look at increased inflation and price inflation. We're already dealing with inflation because of high oil prices, already dealing with high interest rates.
We could look at opportunities in soft commodities and precious metals because those prices will go up. So if your owners of them you get the benefit of the price increases.
So Jeff, I want to talk about copper because we see that copper has already hit an all time high this month. So what opportunities are there when it comes to metals, mining and energy infrastructure?
Yeah. So look, we've been big proponents of owning the infrastructure or the picks and shovels for the AI race for the past five years. Now we increase that. When you look at things like inflationary pressures and an El Nino driving increased copper prices, what happens is when you have increased flooding or droughts, it impacts mining.
So therefore the output shifts. Therefore, you can have greatly increased prices. We already saw in the last El Nino, sugar and cocoa prices went through the roof. We're looking at that again while they're already still at all time highs. And Jefferies came out with a report this morning. They're looking at and Morgan Stanley quotes this to at least about a $3 trillion GDP hit over the next five years due to this coming El Nino.
So it's a big price impact.
Yeah. No, it's definitely interesting to see how this is all going to play out in the next couple of months. So let's talk about the emerging markets. Because even though emerging markets outperform both developed markets and U.S. equities last year, the firm warns a bearish impact from El Nino. So take us through how the weather pattern could pressure selected emerging markets, sovereign debt through sovereign credit rates and FX impact?
Yeah, so a lot of energy production in the South is coming from hydro. And when you have a drought you have reduced hydro. We've already seen the impacts in the last El Nino reduced energy output because hydro can't run if there's not enough water running through the system, or if the droughts are bad enough.
We're already seeing that in the US and the Midwest reservoirs in our all time lows, so that pressure on energy is more of an impact for southern countries that are relying heavily on hydro. But it is in a place like the US, for instance, which doesn't rely heavily on hydro for their energy output, but then also floods output on agricultural yields.
That all has much bigger impacts across the emerging markets.
That's definitely interesting. And I want to talk about a section that not many people think about when it comes to to El Nino. A packaged food companies are they've also listed a bearish category because of inflation pressure. So how does El Nino hit inflation plus squeeze companies in the sector.
Yeah. So you're looking at reduced yields. So the companies that are already selling these packaged products aren't benefiting benefiting from higher prices. They're dealing with the negative impacts of higher prices. They're paying more for those vegetables and yields and crops that they had to before.
But also distribution. If you have reduced shipping through the Panama Canal, what happens immediately is prices get higher. So these companies that are relying on the end product of the harvest and the next line in their infrastructure is having to ship those shipping costs get more expensive, the crop yields get more expensive, those companies get squeezed.
That's definitely interesting. So so Jeff, this week is a big week. Everyone's going to be looking at the fed. So what are you expecting from the fed this week and how could a rate hike hit markets?
I mean, he is under a lot of pressure. He was hired to not raise rates. There's a lot of pressure to raise rates. I mean, most of the you know, forecasts are looking at 3 or 4 rate increases by the end of the year with if this war isn't stopped, you're going to have to raise rates to deal with increased prices. I mean, right now, what the only engine you had driving returns was growth engine.
So profitability has been huge this year, especially on AI and energy on energy companies. But now all of a sudden you have talks this morning and this weekend of a slowdown in AI. That pressure, along with higher yields and potentially rising interest rates, could really roil the markets this week.
Awesome. Well, Jeff, thank you so much for joining us and for your time today.
Thanks for having.
Me.
