Scorching summer temperatures persisted across the U.S. on Wednesday, and throughout parts of Europe, the Middle East, and Asia, posing health hazards, straining energy grids, and disrupting tourism.
There are also risks for investors.
Phoenix is marking its 20th-straight day of temperatures at 110 degrees or higher. Multiple states are under excessive heat warnings and advisories, affecting around 80 million people from Southern California to Florida. The National Weather Service said the conditions are expected to continue.
Part of the reason is the return of the El Niño weather pattern, characterized by warm ocean waters, that is exacerbating the effects of climate change. Add to that smoke from wildfires, heavy downpours leading to major floods, and the emergence of heat domes that are trapping hot air across wide swaths of the globe.
U.S. weather stations have recorded high temperatures that beat or tied the record 576 times in July, according to the National Oceanic and Atmospheric Administration.
In Italy, Rome reached a record high of 109 degrees. An airport in Iran recorded a temperature of 152 degrees earlier this week.
Extreme weather poses a risk to companies and their assets, and can weigh on stock markets, according to 2019 research from University of California Davis. Using NOAA data from 2003 to 2017, the researchers found that stock markets dropped 0.4% in the first 20 days after the beginning of a heat wave, and 0.7% for longer periods. The most exposed stocks dropped 1% to 2%.
Here are some issues for investors to consider.
Insurance Risks
Insurance companies have dropped doing business in disaster-prone California, Louisiana, and Florida, citing heightened risks and rising costs. From 2018 to 2022, the U.S. saw an average of 18 weather disasters every year, each with more than $1 billion in losses.
State Farm stopped selling new homeowner policies in California, as did
Allstate
(ticker: ALL) after multiple costly wildfires. Farmers Insurance this month joined more than a dozen other Florida insurance companies that have stopped writing home and auto policies in Florida after multiple costly hurricanes.
Farmers told Barron’s the decision was made to effectively manage risk exposure. “Affected customers will receive notifications detailing when their coverage will end and will be advised of options for replacement coverage,” it said in a statement.
Floridians pay an average of $4,231 in annual home insurance premiums, three times the national average, and the cost rose 33% in 2022, compared with 9% in the rest of the nation, according to the Insurance Information Institute.
Food Prices
Wheat futures were already rising after Russia’s invasion of Ukraine, a major grain producer. On Wednesday they surged 7.8% after reports that 60,000 tons of grain were destroyed in a Russian missile attack on Odesa Oblast. That’s the largest gain since February 2022.
U.S. production of hard red winter wheat, the type used to make bread, is up 9% from last year but remains historically low, according to the Agriculture Department.
The European Central Bank and Potsdam Institute for Climate Impact Research said climate change has pushed up food prices, and global warming is projected to raise annual food prices and inflation as much as 3.2 percentage points.
Market Uncertainty
Because weather adds a measure of uncertainty that markets can’t predict, more hedge funds are hiring meteorologists and commodities analysts to predict those changes.
Hedge fund Citadel has hired at least 20 weather scientists within its commodities trading business to help forecast weather and energy supply and demand, which helped drive its 38% returns last year, according to the Financial Times. Its U.S. weather team is led by senior weather analyst Heather M. Archambault, who joined Citadel from NOAA.
Jeffrey Kleintop, Charles Schwab & Co.’s chief global investment strategist, has advised investors to keep weather in mind, especially because of the risks El Niño poses.
He points out that history has shown rising volatility linked to weather events. The MSCI world index fell 13% in 2015 and 2016 during the strongest El Niño ever recorded, MarketWatch reported, adding there were other factors and it was short-lived. But investors could see volatility hit agriculture, energy, and materials sectors like it did back then, Kleintop said.
Uncertainty also makes it difficult for companies. While makers of generators and heating, ventilation, and air conditioning systems stand to gain from a burst of sales during extreme weather, other companies such as home furnishings retailers and restaurants could feel the pinch from people staying home instead of venturing out.
Climate Justice
Arizona’s largest utility said demand for electricity has reached record highs in recent days, and Texas’ power grid has also seen high demand amid triple-digit temperatures across Central Texas.
Higher electricity bills to power air conditioning will most hurt lower-income households who are already grappling with higher food and energy prices. And in much of the world that is sweltering without widespread access to air conditioning, record temperatures will likely exacerbate economic inequality and calls for climate justice.
A group of European nations is pressing for an “urgent phase out” from planet-warming fossil fuels ahead of the United Nations’ annual climate change conference in Dubai later this year.
COP28 is where nations will check their progress on a 2015 global pledge to limit global warming to certain levels by 2050. The recent statement called for greenhouse gas emissions to peak by 2025 at the latest and be cut 43% from 2019 levels by 2030.
Write to Janet H. Cho at [email protected]
Read the full article here
