THIS summer's El Nino – expected to be one of the three strongest since 1950 – could directly affect a range of companies this summer, including Graincorp, Harvey Norman, JB Hi-Fi, Coca-Cola Amatil, AGL, and mining stocks.
El Nino is an oceanic and atmospheric phenomenon associated with warming of the Pacific Ocean which results in a major shift in global weather patterns. Its effects in Australia include less rainfall, warmer temperatures, and increased risk of bushfires.
Morgan Stanley, in a research paper on El Nino, said many Australian companies would be affected.
The retailing sector, for example, will benefit from consumers wanting to cool off and drink more.
"Harvey Norman and JB Hi-Fi could benefit from increased sales of products like fans and airconditioners, but Morgan Stanley's preferred pick in the consumer sector for leverage to El Nino, among other reasons, would be Coca-Cola Amatil.
"Warmer weather is likely to see a rise in beverage consumption."
During the last pronounced El Nino, said Morgan Stanley, Coca-Cola Amatil's Australian beverages volumes grew 9.6 per cent.
Energy retailers would also benefit as consumers turn on fans and airconditioners. "We would expect to see higher grid demand than the same period last year – this should be a positive for the likes of AGL and Origin."
Paradoxically, despite the increased risk of bushfires, insurers would also benefit, said the bank.
"Drier weather tends to result in lower catastrophe costs...storm damage tends to be more costly than droughts and bushfires, given it tends to occur in more densely populated areas.
"Morgan Stanley points out that historically, catastrophe losses during El Nino events are on average 40 per cent lower than in periods when La Nina occurs."
The two insurers that would benefit most were IAG – with an estimated 5.5 per cent earnings per share upside – and Suncorp, with an estimated 3.5 per cent earnings per share upside.
Tourism would benefit from reduced cyclone activity in Queensland and the lesserlower risk of flooding in Victoria and New South Wales.
Resources companies would enjoy a net benefit. Drier weather meant that mining operations suffered from less flooding and damage from heavy rainfall – a benefit. On the other hand, it also meant more output in the market, which would weigh on prices.
Wet weather in the southern hemisphere summer tended to affect iron ore production in Australia and Brazil, said UBS commodities analyst Daniel Morgan.
But an El Nino could well produce less rainfall and, therefore, better supply. "That's probably a bearish risk [to prices]" he said.
Morgan Stanley said an El Nino would provide a net positive for resources exporters.
"There tends to be fewer tropical cyclones in El Nino years (particularly in Queensland) thereby reducing the likelihood of major flooding or damage associated with heavy rain or winds.
"This translates into a net positive for resource exporters given there is a reduced probability of weather-related port disruption or force majeure."
The agricultural sector, however, would suffer – particularly the wheat, grain and cattle industries.
"Higher risk of drought, increased probability of bushfires and reduced rainfall leaves the agricultural sector particularly vulnerable," said Morgan Stanley.
"Australia exports two-thirds of the food it produces and its largest agricultural exports are beef and wheat."
But despite the impact on agriculture, "the net effect on Australia's economy is likely to be less severe than in a La Nina year, when there is increased cyclone activity and rainfall."
A paper from Macquarie, "El Nino global winners and losers" backed many of the conclusions from Morgan Stanley.
"We believe this year may see one of the three strongest El Nino events since 1950," said the paper.
"Companies in North America and Australia/New Zealand are most likely to be impacted, followed by companies in Asia."
The paper singled out Australian agribusiness Graincorp as one of two global stocks (the other being US agribusiness Deere) most likely to be adversely affected by an El Nino. Both were slapped with an underperform rating.
Nufarm and Incitec Pivot – both materials companies with agricultural exposure – faced "downside risk"; Mount Gibson Iron faced "clear risk"; Beadell Resources and Auswide Bank were also given an underperform rating.
But other Australian companies would benefit, said Macquarie, particularly insurers.
These companies were given an outperform rating: Orara, Village Roadshow, Suncorp, QBE Insurance, APA GRoup, BHP, Rio Tinto, Fortescue Metals Group, and BC Iron.
