El Niño may topple bonds

There's been a lot in the press recently on how the climate impacts on investing. The world's wealthiest nations this week agreed to phase out fossil fuel emissions this century (the "how" part was left vague), while Norway's vast sovereign wealth fund is pulling out of coal-dependent businesses. Our long-held view is that it's hard to predict the effects of climate change itself but if governments are bent on making rules and spending taxpayers' money to combat it, it's worth paying attention to the opportunities and threats created.

But another weather event could have a much more immediate impact on your portfolio El Nio. I'm no meteorologist, so forgive me for keeping this basic El Nio is a weather phenomenon involving prolonged warming of parts of the Pacific. This has the knock-on effect of causing all sorts of unusual and extreme weather across the world. It looks likely that we'll see a particularly severe El Nio this year, reckons the Australian Bureau of Meterology.

What's this got to do with your investments? Potentially rather a lot, as it turns out. One of our favourite analysts, Jonathan Allum of SMBC Nikko, highlights a recent paper from Cambridge economists Paul Cashin, Kamiar Mohaddes and Mehdi Raissi, looking at the impact of El Nio episodes between 1979 and 2013. There are elements you'd expect the disruption to agriculture in various parts of the world tends to drive up crop prices. But more surprising is that, taken globally, El Nio is actually good for global growth.

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It's miserable for certain regions, disrupting crop production in the likes of Australia, Indonesia and New Zealand. But in the US it tends to result in wet weather in California (which would be great news for that drought-savaged region), warmer winters in the Northeast, and fewer tornadoes and hurricanes.

The severe El Nio of 1997-1998 is thought to have boosted US GDP by 0.2%, for example. Other net beneficiaries include Thailand, Mexico, China and Japan. This overall boost to global growth meansEl Nio also tends to push up crude oil prices by even more than soft commodities.

Of course, this all drives inflation higher too. That might not matter in more normal times, but in an era when fear of deflation still grips the market and yields are at record lows, any hint of a resurgence in growth and inflation could be just the trigger needed to spark a bigger sell-off in an already vulnerable bond market. Allum suggests moving money out of bonds and into equities and commodities.

And if we can avoid a massive bond crash, equities at least decent value ones, which could include the beaten-down commodity plays look more attractive than bonds. But we'd keep some money in gold and cash too, just in case the changing weather heralds the perfect storm for bonds that MacroStrategy Partnership's James Ferguson warned of in MoneyWeek last month.