Navigating El Niño: the implications for EMD

El Niño is more likely to create country-level dispersion in emerging-market debt than a uniform shock across the asset class.

• In September, NOAA put the probability of a very strong El Niño during the Northern Hemisphere autumn and winter above 90%, while the World Meteorological Organization expected the episode to peak toward year-end and persist into early 2027.
• Food is the main transmission channel because droughts, excessive rainfall and heat can raise domestic food prices, delay monetary easing and generate second-round inflation, especially where food has a large weight in consumer baskets.
• FAO data indicate that global cereal inventories remain relatively comfortable, so local weather conditions matter more than a broad global commodity-price shock; Colombia is particularly exposed because weak reservoir levels could increase electricity costs and hurt industrial activity.
• Colombia, Indonesia, the Philippines, India and parts of Central America appear vulnerable through agricultural exposure, food inflation and hydropower dependence, although India's grain inventories and policy tools provide a buffer.
• Argentina and southern Brazil could benefit from higher rainfall supporting grain production, while Chile could gain from better hydrological conditions and lower marginal electricity costs, though flooding could reverse these effects.

Takeaway: Investors should treat El Niño as a dispersion trade, monitoring rainfall, crops, inventories, reservoirs, fiscal responses and external liquidity; L&G is taking a wait-and-see approach and remains cautious on countries with weak fiscal positions or elevated policy uncertainty.