Why the 2026 Super El Niño Matters Mainly Through Inflation

When I think about El Niño, the first thing that comes to mind is usually weather: droughts, floods, bushfires and storms. But for investors, I think the more important question is what happens after the weather changes. A super El Niño does not automatically mean a market crash, nor does it guarantee that every commodity price will surge. Its real significance depends on where the disruption occurs, when it happens and whether it hits economically important areas. A storm in a sparsely populated region can have very different consequences from the same storm passing through a major city, where insurance claims, infrastructure damage and economic disruption can quickly multiply.

The reason I think this particular El Niño deserves attention is the environment it could arrive in. The podcast discussion describes Pacific temperatures as around 2.5°C above normal, with estimates of a 60% to 90% probability of a super El Niño depending on the authority or country considered. But the weather event itself is only part of the story. The bigger concern is that it could add another inflationary shock to an economy that is already dealing with higher food, energy and other costs.

How El Niño Drives Global Food and Supply Chain Inflation

Inflation is already under pressure. Adding another shock to food, energy, fertiliser and reconstruction costs may not cause an immediate collapse, but it can make the existing problem harder to resolve.

Food is one of the clearest channels. Typically, sever El Nino can impact global food prices by as much as 5%. At the same time, agriculture is already facing other pressures, including higher oil and fertiliser costs and disruption related to war. Fertiliser supply could also become an issue because a significant amount of production is concentrated in the Middle East.

Then there is the less obvious problem of rebuilding.

A major disaster can damage electricity networks, transformers, roads, homes and other infrastructure at exactly the same time as construction resources are already being used to build data centres. That creates competition for labour, machinery, electrical equipment and other scarce inputs.

So even if the initial weather event is temporary, its economic effects can last considerably longer.

Insurance Stocks Under El Niño: Risks, Claims, and Premium Cycles

Insurance is one area where the connection between extreme weather and markets is relatively straightforward. More bushfires, floods, hurricanes or typhoons can mean more claims, and Australia is one country that could face greater bushfire-related losses during a severe El Niño.

But I would be careful about simply saying that El Niño is bad for insurers.

The location and severity of disasters matter enormously. A major disaster can produce a wave of claims, hurting insurers in the short term. Yet insurers can then raise premiums, potentially improving future profitability if another major disaster does not immediately follow.

There is another problem for insurers: bonds.

Insurers typically hold large bond portfolios, so if inflation remains high and conventional bond prices weaken, they can face pressure from both sides. That makes the sector particularly interesting if inflation remains stubborn.

This creates something of a cycle. Insurers may be vulnerable before or during a period of heavy claims, but after a major disaster, the resulting increase in premiums can eventually create an opportunity. The difficulty is that nobody knows exactly where or when the next major disaster will occur.

The strange economics of rebuilding

One of the more interesting ideas in the discussion is what could be called the stimulus paradox.

A natural disaster destroys wealth and productive capacity. Yet the rebuilding that follows can increase measured economic activity. Governments spend money repairing infrastructure, insurers provide funds for rebuilding, and construction companies receive new work.

That does not mean the disaster has made the economy richer.

It is similar to the old broken-window fallacy: breaking a window creates work for the person who replaces it, but society has still lost a window that was perfectly usable before. Reconstruction can generate economic activity, but much of that spending is simply replacing something that has already been destroyed.

For investors, however, the distinction matters less than understanding where the money actually goes.

Construction companies and infrastructure suppliers could benefit from urgent rebuilding. But if construction workers, transformers, electrical equipment and machinery are already in short supply because of the data-centre boom, reconstruction could push prices even higher.

That is where the inflation story comes back into focus.

The question is not simply whether a disaster increases or reduces GDP. It is who pays, who receives the rebuilding money and whether that demand arrives when supply is already constrained.

Higher commodity prices do not mean every producer wins

Commodities provide another trap for investors.

If El Niño disrupts production, prices for crops or raw materials could rise. At first glance, that sounds like a straightforward opportunity to buy commodity producers. But the company that produces the commodity may also be the company whose assets have just been damaged.

Consider a farmer. If a farmer's crop survives while competitors lose theirs, higher prices can be fantastic. If that farmer's own crop is destroyed, however, higher prices may not make up for the lost production.

The same principle applies to mining.

If flooding in Chile restricts copper production and pushes copper prices higher, that could be positive for an unaffected copper producer. But a company whose own Chilean mines are flooded may struggle despite the higher copper price.

That is why I would look much more closely at the location of a company's assets than simply at the commodity it produces. Investors need to understand whether the company benefits from someone else's supply shortage or suffers from losing its own production.

Food shocks could hit developing markets harder

Food inflation also has a very different impact depending on where people live.

In developing markets, basic food tends to represent a much larger share of household spending. If wheat prices double, for example, households can feel the effect directly through the cost of staple foods.

In developed markets such as Australia, wheat represents a much smaller portion of the final price of a loaf of bread. Consumers may also have more ability to switch to cheaper alternatives.

That does not mean Australia's agricultural sector is immune. Australia is a major agricultural exporter, and poor weather can reduce production and farm incomes. But the outcome is not predetermined. Rainfall at the right time could limit the damage, while poor weather in another major exporting country could actually improve Australia's relative position.

The global food system is also surprisingly resilient. Weather disruptions are constantly occurring somewhere, so supply can often be redirected from one region to another. But that resilience has limits. Fertiliser shortages, higher oil prices, tariffs and other existing pressures mean the system is already carrying a heavier load.

What does this mean for interest rates?

For me, this is where the investment implications become clearest.

The biggest risk is not necessarily a single bad harvest or a particularly destructive storm. It is higher inflation for longer.

If food, energy and reconstruction costs rise while inflation is already elevated, central banks may have less room to cut interest rates. Rate cuts could be delayed, reduced or, in a more extreme scenario, replaced by another round of increases.

That is particularly important for bonds.

Conventional bonds can struggle when unexpected inflation rises because their fixed payments become less valuable in real terms. Inflation-linked bonds, by contrast, provide greater protection against an unexpected increase in inflation.

The portfolio logic is therefore fairly simple: if El Niño adds another inflation shock, I would rather have some protection against persistent inflation than assume that interest rates will quickly return to lower levels.

The bigger investment lesson

Ultimately, I don't think the investment takeaway from a super El Niño is to make one huge bet on weather.

The more useful approach is to think through the chain reaction.

Where does the weather disruption occur? Which assets are affected? Who pays for the damage? Who receives the reconstruction spending? Which companies face higher input costs? Which producers benefit from supply shortages elsewhere? And, most importantly, does the shock arrive at a time when inflation is already proving difficult to control?

That is why the broader portfolio conclusion is less about predicting the exact path of the weather and more about managing the inflation risk it could create. Insurers may face higher claims before potentially benefiting from higher premiums. Construction companies may receive more work but face tighter labour and equipment markets. Commodity prices may rise while some commodity producers suffer from damaged assets. Developing markets may feel food inflation more acutely than developed economies.

And for bonds, the biggest concern is that another inflation shock could keep rates higher for longer.

I think that is the part of the super El Niño story investors should pay closest attention to. Weather forecasts can tell us where the rain, droughts and storms might appear, but markets care about what those events do to prices, profits and interest rates. If this El Niño arrives on top of an already inflationary environment, its importance may have much less to do with the weather itself and much more to do with whether it gives inflation another reason to stay higher for longer.

These findings were originally featured on Episode 426 of Nucleus Investment Insights, where we reviewed the market impact of the 2026's Super El Niño.

Take us on your daily commute! Nucleus Investment Insights is available in Podcast form on iTunes and all major Android Podcast Platforms, including Spotify.

Be sure to subscribe to our channel on YouTube to get notified whenever we're going live.