The climate phenomenon El Niño is back. For investors, this is interesting not only because of its potential impact on the climate, but above all because of its economic consequences. A strong El Niño can put additional pressure on food, water and energy supplies. This also creates new investment opportunities, says Nedialko Nedialkov, Senior Portfolio Manager Thematic Equity at Allianz Global Investors.
El Niño is a natural climate phenomenon in the Pacific Ocean. During an El Niño period, seawater in the central and eastern parts of the ocean becomes warmer. Although El Niño is not caused by climate change, it is now occurring against the backdrop of a much warmer world. According to NOAA, June 2026 was the second-warmest June ever recorded.
The US weather service NOAA confirmed on 9 July that El Niño is strengthening. There is a 97% probability that the phenomenon will continue until early spring 2027. There is also an 81% chance that El Niño will develop into a ‘very strong’ event in the fourth quarter of this year. This could make the current El Niño one of the strongest since measurements began in 1950.
For investors, the key question is what this means for sectors that are essential to the economy.
Agriculture: rising demand for technology
Rice illustrates well how climate and the economy are interconnected. More than half of the world’s population depends on rice as a staple food. At the same time, production is highly sensitive to drought and high temperatures. According to the World Bank, rice production in some regions could decline by 20% to 50% if El Niño continues into 2027. South Asia, southern Africa and parts of East Asia are particularly at risk.
For investors, this is not only a risk to food prices, but could also provide a boost to agricultural technology. Smart irrigation, soil sensors, more precise farming machinery and drought-resistant crops can help farmers produce more food with less water.
This represents a structural growth market. Agriculture accounts for around 70% of global freshwater withdrawals, making more efficient water use increasingly important.
Water becomes an investment issue
The water sector also deserves greater attention. One major problem is so-called ‘non-revenue water’: treated water that is lost through leaks, theft or inaccurate water meters.
According to the World Bank, this costs utilities around $14 billion worldwide every year. In developing countries, halving these losses could provide enough additional water to supply another 90 million people.
For investors, this creates opportunities in companies providing leak detection, smart water meters, sensors, pumps and digital analytics. As water becomes scarcer, the economic value of these technologies is likely to increase.
Energy: investing in a more resilient electricity grid
Extreme heat can also make energy supplies more vulnerable. France provides a good example. Nuclear power generates around two-thirds to 70% of the country’s electricity, but nuclear plants depend on cooling water. During the European heatwave, some rivers became exceptionally warm and water levels fell. As a result, nuclear plants had to reduce their output or temporarily shut down. According to Le Monde, the heat in June affected around 4.6% of France’s nuclear capacity.
For investors, this highlights the importance of investing in a more flexible and resilient electricity grid. Batteries, transformers, power lines, smart software, energy-efficient buildings and efficient cooling systems could all benefit from the growing need for a more reliable energy system.
According to the International Energy Agency, around 80 million kilometres of power lines will need to be built or replaced worldwide by 2040. Annual investment in electricity grids will need to roughly double to more than $600 billion by 2030.
From climate risk to investment opportunity
El Niño shows how a climate phenomenon can affect commodity prices, food supplies and energy security. For investors, this makes the underlying trend particularly interesting: the world increasingly needs technology that uses scarce resources more efficiently, as well as infrastructure that can withstand more extreme conditions.
The opportunities therefore extend beyond traditional commodity producers to companies providing solutions for water management, agricultural technology, electricity grids, energy storage and efficient cooling.
El Niño may be a temporary event, but the investment opportunities associated with it are much more structural.
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