Major asset managers including Pictet and Man Group are warning about cross-asset shocks from a powerful El Nino, spanning crop losses, energy price swings, rising inflation and pressure on sovereign debt, as climate risk moves into the core framework of portfolio assessment.
Fixed income research firm Anthropocene has cautioned that sovereign bond markets in Indonesia, Brazil and Colombia are especially vulnerable. The super El Nino is emerging as a systemic risk for global asset allocation.
Crop losses, energy price volatility and inflation pressure may reinforce one another, and in a macro environment of high rates and heavy debt burdens, could further hit emerging market sovereign bonds, real assets and carbon credit projects.
Katie Self, portfolio manager at Pictet Asset Management, said it is almost certain this will be the most extreme El Nino event on record, and no corner of global asset markets can be completely immune. She described responding to this climate disruption as her current absolute priority.
Institutions such as Man Group and T. Rowe Price have issued warnings or launched dedicated models. According to earlier Bloomberg reports, some boutique hedge funds have also built investment strategies around this climate cycle.
Compared with past episodes, this El Nino may coincide with higher interest rates, heavier debt loads and more frequent market selloffs, making it easier for climate shocks to transmit across multiple asset classes.
Macro Fragility Amplifies the Shock, Rates and Sovereign Debt on the Front Line
Anthropocene Fixed Income Institute analysts Kamesh Korangi and Rose Choy said in a research note this week that the current macro environment differs significantly from historical El Nino cycles. Higher rates, debt levels and market volatility could amplify the impact of climate shocks on asset prices.
The two named Indonesia, Brazil and Colombia as having relatively fragile sovereign bond markets, and warned that risks could spread to other global markets. El Nino's impact on agriculture, energy and infrastructure may add to fiscal pressure in developing countries, in turn affecting sovereign credit ratings.
T. Rowe Price has built customized models for its $165 billion emerging market bond and equity portfolios to assess and manage related risks. What institutions are watching is no longer just higher agricultural prices, but also inflation changes, rate adjustments and sovereign credit deterioration triggered by climate shocks.
Energy markets have also become an important trading direction. Zulfiqar Ali, founder and chief investment officer of ZAMS Asset Management, said winter is often a key period when climate, geopolitics and structural factors converge, and managers with analytical advantages and risk management skills may earn excess returns.
Currently, strategies around El Nino cover inflation-linked rate derivatives, directional trades in energy commodities, and agricultural assets that may be affected by drought or flooding. According to forecasts by world meteorological agencies, this strong El Nino will likely persist until early 2027.
Real Assets and Carbon Credit Projects Face Direct Impact
For investors holding land, agricultural and forestry assets, extreme weather can directly affect output and valuations. Forest fires in Southeast Asia, a weak Indian monsoon, and coexisting floods and droughts in parts of South America have already pressured related assets.
Jonathan Dean, head of natural capital strategy at BNP Paribas Asset Management, is closely monitoring forest fire risk in Indonesia and elsewhere, assessing potential losses to carbon credit projects. His strategy manages more than $560 million, with capital from development finance institutions including the International Finance Corporation.
The team is working with local project developers in Indonesia, using insurance tools and remote sensing technology to assess risks and improve management plans. For projects that rely on forest protection, agricultural production or carbon credit revenue, extreme weather can not only cause direct losses but also increase uncertainty in future cash flow forecasts.
As climate risk is incorporated into asset pricing, investors also need to reassess project revenue stability and whether risk compensation is sufficient.
Climate Adaptation Technology Becomes a New Allocation Direction
Some asset managers are turning climate risk into investment opportunities. Pictet's Katie Self said her team is looking for technology companies that can cope with extreme weather, including smart irrigation equipment suppliers, agricultural technology firms that help crops root deeper under drought conditions, and providers of urban flood control and rainwater management systems.
Self manages the $5.1 billion Pictet Global Environmental Opportunities Fund. She noted that El Nino is not a new phenomenon, but it is now occurring on a higher global temperature baseline, and warming combined with extreme weather may significantly worsen its impact.
From agricultural water saving and crop drought resistance to urban flood control, climate adaptation technologies are expected to benefit from growing demand. However, expanding demand does not necessarily mean related assets will rise; the pace of technology commercialization, project returns and valuations remain key to investment decisions.
For global asset managers, the real challenge of a super El Nino is that climate shocks may simultaneously affect inflation, interest rates, sovereign credit and real assets. Against a backdrop of high debt and high rates, hedging risk in a single asset may not be enough to cope with cross-market transmission, and the overall resilience of portfolios is being tested.
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