Climate change has become increasingly noticeable in recent years as extreme weather events are starting to happen more often. In Europe, temperatures exceeding 45 degrees Celsius, tornadoes, flash floods and out of control wildfires are becoming more frequent.
In 2022 the hurricane Ian in the US was the top loss producing event worldwide with an estimated 95 billion dollars in damages, writes eToro analyst for Romania, Bogdan Maioreanu.
It was followed by an event that started to happen each year, the drought, that in Europe produced 22 billion dollars and in the US 15 billion dollars in losses. Global insured losses from natural disasters in 2022 are estimated at 132 billion dollars, well above the short, medium, and long-term averages. Roughly 42% of direct aggregated economic losses were covered by public and private insurance entities, translating into a global protection gap of 58% according to an AON report. And notably, there was only one earthquake in the top 10 events, Fukushima. All others were weather events.
In Europe, Romania sits on fourth place when coming to the aggregate protection gap score for the five perils (earthquake, flood, wildfire, windstorm and coastal flood), according to EIOPA. The first one is Greece followed by Italy and Croatia. After us there are Bulgaria, the Netherlands and Portugal. This can be explained by the fact that these countries have high hazards and low insurance penetrations.
This summer some of these perils have materialized so far with out of control wildfires in Greece, Italy, Portugal fueled by very hot weather alongside temperatures in excess of 42 degrees Celsius. The World Meteorological Organisation said that July started with the hottest week on record. This is down to a combination of climate change and El Nino – a weather phenomenon that warms the Pacific Ocean. But this weather pattern brings massive storms too, like the recent one in the western part of Romania with winds exceeding 90 km/h.
Damages aside, global warming and the measures humanity is taking to slow it down could also bring new opportunities for investors. They offer a structural boost to renewable energy themes, like solar and wind and also to seasonal stocks that benefit from weather extremes like natural gas, HVAC, generators, home improvement, and auto repair. To measure the opportunities, we created a simple-weighted basket of six stock segments seen as beneficiaries of extreme hot or cold weather are included natural; gas producers (EQT, AR, LNG), air conditioning and heating manufacturers (CARR, JCI, UWSO), back-up generators (GNRC, CAT, CMI), home improvement (HD, LOW, FND), auto repairs (ORLY, AAP, AZO), and renewables like solar (FSLR, SEDG, RUN). This extreme weather basket’s big outperformance was led by solar since the pandemic (see chart). Its performance continued this year as weather disruption took center-stage. From 2013, the extreme weather basket grew by over 550% and the S&P 500 by almost 270%.
The world is on track for new temperature records this year. Whilst half the most costly weather catastrophes have come in the past five years, the number of high-impact events is steadily rising. The effects of this are manifold, spanning from the difficulty of working outside (and sometimes indoor) to rising insurance and healthcare costs all the way to investor behavior, including lower stock market volumes.
Extreme weather also puts pressure on electrical grids affecting hydro and nuclear power availability, disrupts travel and tourism, and impacts food supplies ranging from food basics to cocoa to orange juice, leading to inevitably higher prices. Mitigation measures and alternatives to disrupted items are an area of increased focus for investors looking to balance their portfolio in recent years, from the rise of renewables to “old” sectors like gas generators or HVAC.
UN says climate change ‘out of control’ after likely hottest week on record-Guardian
