Every El Nino event in the past 60 years has had a significant impact on financial markets, triggering spikes in commodity prices, higher inflation, bond market volatility and sharp sector divergences across stock markets.
With scientists predicting 2026 could usher in one of the biggest El Nino events in history, this article explains what El Nino is and how it could impact investment portfolios more broadly.
The global cost of natural disasters caused by extreme temperature, wildfire, flood and drought has risen from around $20 billion a year in the 1990s to repeated spikes ranging between $80 billion and $100 billion since 2010, according to Our World in Data.
What is El Nino?
El Nino and La Nina are natural phenomena occurring every two to seven years, which can lead to extreme weather. El Nino is characterised by warming global temperatures, while La Nina years are typically cooler.
While these phenomena are separate from climate change, in combination they amplify the warming of oceans and the atmosphere, creating a dangerous double-act for the planet’s weather.
Research from Imperial College London suggests climate change could double the frequency of El Nino events over the next century.
2026 shaping up to be a ‘super El Nino’ event
On 10 June, Japan’s Meteorological Agency was the first of the major weather agencies to declare that an El Nino has officially formed in the tropical Pacific.
The agency forecasts nearly a two-thirds chance of a ‘very strong El Nino’ forming from November 2026 to January 2027 which would “rank among the largest El Nino events in the historical record.”
This increases the risk of extreme weather which could have far reaching effects across the globe.
Research from Dartmouth College estimated the 1997 El Nino reduced global GDP by around $5.7 trillion over five years.
How prepared is the insurance industry?
In theory, the prospect of extreme weather events should increase the price of catastrophe insurance, which should be good for profits. The reality is that prices have been softening in recent quarters as more competitors have entered the market.
This follows a long period of relatively few large losses, which has emboldened risk taking.
Perhaps counter-intuitively, El Nino could offer some good news in relation to the traditional Atlantic hurricane season, with experts predicting a below seasonal storm count for late 2026. This is related to lower winds across the tropical Atlantic.
That said, the prediction of fewer storms does not necessarily equate to below-average losses for insurance companies because one landfall of a major storm can be very destructive. For example, Hurricane Andrew in the 1992 El Nino year caused tens of billions of dollars in localised damages.
However, lower Atlantic hurricane activity is likely to be offset by increased Pacific basin storms, droughts and floods in other parts of the world.
UK subsidence risks
Closer to home, when it comes to the UK and Europe, El Nino is likely to create hotter, drier conditions which raises risks of subsidence.
Data from the Association of British Insurance shows subsidence payouts reached £219 million following the 2022 heatwave, while by 2025 in the hottest year on record, that number rose to £307 million.
Food prices could rise significantly
Outside the insurance sector, one of the biggest effects from El Nino could be seen in food prices and agriculture.
Research by Schroders argues that food prices in western economies could see significant rises if the past strong link between El Nino events and agricultural prices repeats in 2026.
The researchers say: “if this confluence of factors caused the UN FAO food price index to rise 50% by year-end, the usual lags mean G7 food inflation would probably hit double digits in 2027 – enough to add over a percentage point to headline inflation.”
They point out that 2026 is already seeing extreme weather conditions with more than half of the US in drought in early June, affecting around 250 million acres of crops.
Meanwhile, a record-busting heatwave swept across Europe in May, and parts of India have seen temperatures above 40 degrees Celsius.
The spike in fertilizer prices due to the closure of the Strait of Hormuz is likely to add to agriculture production risks where fertilizer was not secured ahead of the conflict.
Schroders believes that while the importance of food to consumer baskets varies, ranging from 10% to 15% in developed markets to 25% or more in emerging markets, a wave of food inflation coming just as the current energy shock subsides would keep pressure on consumer wallets.
This increases the chances that inflation remains elevated with potential second-round effects on wages, which would be unwelcome news for central banks trying to keep a lid on inflation.
Martin Gamble: Shares and Markets Writer
Martin Gamble is Shares and Markets writer at AJ Bell. He was previously the Education Editor of Shares Magazine. He has been with the business since 2019.
Martin graduated from the University of Kent in...
